Magney, Inc., uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 42,000 units next year, the unit product cost of a particular product is $61.90. The company's selling and administrative expenses for this product are budgeted to be $818,800 in total for the year. The company has invested $480,000 in this product and expects a return on investment of 10%.The selling price for this product based on the absorption costing approach would be closest to: (Do not round intermediate calculations.)
A) $82.54
B) $120.37
C) $68.09
D) $81.40

Question

Quizplus · Accepted Answer

The selling price is calculated by adding the unit product cost, the per-unit selling and administrative expenses, and the desired return on investment per unit. The unit product cost is $61.90. The per-unit selling and administrative expenses are $818,800 / 42,000 units = $19.50. The desired return on investment per unit is ($480,000 * 10%) / 42,000 units = $1.14. Adding these together gives $61.90 + $19.50 + $1.14 = $82.54.