Ecob Corporation uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 19,000 units next year, the unit product cost of a particular product is $16.00. The company's selling and administrative expenses for this product are budgeted to be $250,800 in total for the year. The company has invested $440,000 in this product and expects a return on investment of 14%.The selling price based on the absorption costing approach for this product would be closest to:
A) $59.21
B) $29.20
C) $32.44
D) $18.24

Question

Quizplus · Accepted Answer

Unit product cost = Direct materials + Direct labor + Manufacturing overhead = $16.00
Selling and administrative expenses = $250,800
Total cost = Unit product cost x Budgeted sales + Selling and administrative expenses
Total cost = $16.00 x 19,000 + $250,800 = $594,800
Return on investment = 14%
Target profit = Investment x Return on investment = $440,000 x 14% = $61,600
Selling price = (Total cost + Target profit) / Budgeted sales = ($594,800 + $61,600) / 19,000 = $32.44 (rounded to the nearest cent)

Ecob Corporation Uses the Absorption Costing Approach to Cost-Plus Pricing