Magney, Incorporated, uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 84,000 units next year, the unit product cost of a particular product is $40.80. The company's selling and administrative expenses for this product are budgeted to be $1,705,200 in total for the year. The company has invested $300,000 in this product and expects a return on investment of 14%.The selling price for this product based on the absorption costing approach would be closest to:
A) $92.25
B) $61.60
C) $46.51
D) $61.10

Question

Quizplus · Accepted Answer

To calculate the selling price using the absorption costing approach, we first determine the total cost per unit, including the desired ROI. The unit product cost is $40.80, and the total selling and administrative expenses are $1,705,200. Dividing the total selling and administrative expenses by the budgeted sales gives us the per-unit selling and administrative expense: $1,705,200 / 84,000 units = $20.30 per unit. The desired ROI is 14% of $300,000, which equals $42,000. Dividing this by the number of units gives us the per-unit ROI: $42,000 / 84,000 units = $0.50 per unit. Adding these together, the total cost per unit is $40.80 (product cost) + $20.30 (selling and administrative expense) + $0.50 (ROI) = $61.60.

Magney, Incorporated, Uses the Absorption Costing Approach to Cost-Plus Pricing