Diedrich Corporation makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 67,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 12%.
Direct labor is a variable cost in this company.
The selling price based on the absorption costing approach is closest to:
A) $83.80
B) $56.32
C) $84.56
D) $126.53

Question

Diedrich Corporation makes a product with the following costs:  The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 67,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 12%.
Direct labor is a variable cost in this company.
The selling price based on the absorption costing approach is closest to:
A) $83.80 
B) $56.32 
C) $84.56 
D) $126.53

Quizplus · Accepted Answer

11eacbfc_c834_505a_8ffe_a3a20530fea6_TB7552_00 Selling and administrative expenses = $4.20 per unit × 67,000 units + $1,581,200 = $1,862,600
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(12% × $420,000) + $1,862,600] ÷ ($56.00 per unit × 67,000 units)
= [($50,400) + $1,862,600] ÷ ($3,752,000)
= [$1,913,000] ÷ $3,752,000 = 51.0%
Absorption cost based selling price = (1 + 0.510) × $56.00 = $84.56

Diedrich Corporation Makes a Product with the Following Costs