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You are advising the management at the company ABC regarding their pricing decisions in relation to a new product.  Existing information is as follows:   Direct materials $4 per unit; direct labor $3 per unit; variable manufacturing overhead $5 per unit; variable selling and administrative expenses $2 per unit; fixed manufacturing overhead expenses $$40,000; and fixed selling and administrative expenses $70,000.   There is an expectation that company will sell 20,000 units. Determine the unit product cost if company uses an absorption costing approach in its cost-plus pricing.  Determine the target selling price given that company uses a 40 percent markup percentage.  It has been brought to your attention that company is making an investment of $100,000 in the making, marketing, and distribution of the 20,000 units of their new product.  The management require a 50 percent return on this investment.  Calculate the markup percentage on absorption costing given this information.  If the company only sells 15,000 units at $21 per unit what would be the return on investment?  Describe a limitation of the absorption costing approach to costing.

- October 5, 2022 - Edwin Tunner

You are advising the management at the company ABC regarding their pricing decisions in relation to a new product.  Existing information is as follows:

 

Direct materials $4 per unit; direct labor $3 per unit; variable manufacturing overhead $5 per unit; variable selling and administrative expenses $2 per unit; fixed manufacturing overhead expenses $$40,000; and fixed selling and administrative expenses $70,000.

 

There is an expectation that company will sell 20,000 units.

  1. Determine the unit product cost if company uses an absorption costing approach in its cost-plus pricing. 
  2. Determine the target selling price given that company uses a 40 percent markup percentage. 
  3. It has been brought to your attention that company is making an investment of $100,000 in the making, marketing, and distribution of the 20,000 units of their new product.  The management require a 50 percent return on this investment.  Calculate the markup percentage on absorption costing given this information. 
  4. If the company only sells 15,000 units at $21 per unit what would be the return on investment? 
  5. Describe a limitation of the absorption costing approach to costing. 
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