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

11ea7761_1646_24d8_81a5_4f798fbdad33_TB2580_00 Selling and administrative expenses = $3 per unit × 9,000 units + $72,000 = $99,000
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(10% × $1,305,000) + $99,000] ÷ ($75 per unit × 9,000 units)
= [($130,500) + $99,000] ÷ ($675,000)
= [$229,500] ÷ $675,000 = 34%
Absorption cost based selling price = (1 + Markup percentage on absorption cost) × Unit product cost
= (1 + 0.34) × $75 = $100.50

The Management of Musselman Corporation Would Like to Set the Selling