The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%.The unit target selling price using the absorption costing approach is closest to:
A) $115.00
B) $86.50
C) $100.50
D) $83.33

Question

The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product:  Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%.The unit target selling price using the absorption costing approach is closest to:
A) $115.00 
B) $86.50 
C) $100.50 
D) $83.33

Quizplus · Accepted Answer

To calculate the unit target selling price using the absorption costing approach, we need to add up all the manufacturing costs (direct materials, direct labor, and manufacturing overhead) per unit and then add a markup percentage to cover non-manufacturing costs and provide a profit.

Using the information given, we can calculate the manufacturing cost per unit as follows:

Direct materials per unit: $210,000 ÷ 9,000 units = $23.33 
Direct labor per unit: $270,000 ÷ 9,000 units = $30.00 
Manufacturing overhead per unit: $189,000 ÷ 9,000 units = $21.00 
Total manufacturing cost per unit: $74.33

Next, we need to add a markup percentage to cover non-manufacturing costs and provide a profit. The required return on investment is given as 10%, which means we need to add a markup of:

Markup percentage = (required return on investment ÷ total investment) x 100%
Markup percentage = (10% ÷ $1,305,000) x 100%
Markup percentage = 0.77%

Adding this markup to the manufacturing cost per unit, we get:

Unit target selling price = manufacturing cost per unit x (1 + markup percentage)
Unit target selling price = $74.33 x (1 + 0.0077)
Unit target selling price = $100.50

Therefore, the unit target selling price using the absorption costing approach is $100.50.

The Management of Musselman Corporation Would Like to Set the Selling