(Appendix 12A)The target selling price based on the absorption costing approach for this product would be closest to which of the following?
Refer To: 12-18
A) $67.04.
B) $81.00.
C) $82.59.
D) $110.76.

Question

Quizplus · Accepted Answer

The target selling price can be calculated using the formula:
Target selling price = (Total cost + Desired profit) / Units of production

From the information given in the question,
Total cost = Direct materials + Direct labor + Manufacturing overhead
= $16.50 + $10.00 + $20.00
= $46.50 per unit

Desired profit per unit = (25% of $46.50) + $4
= $16.63

Total cost + Desired profit per unit = $63.13

Therefore, the target selling price per unit would be:
Target selling price = ($63.13) / (0.8)
= $78.91

However, as given in the question, the company uses absorption costing approach, where fixed manufacturing overhead is included in the cost of the product. This means that per unit cost of the product will be higher than under variable costing approach as a portion of fixed manufacturing overhead will be included in the cost and will be allocated to each unit. In this case, the fixed manufacturing overhead rate is $5 per unit.

Therefore, per unit cost under absorption costing approach will be:
Per unit cost = $46.50 + $5
= $51.50

Target selling price per unit based on absorption costing approach can now be calculated using the above formula as follows:

Target selling price = (Total cost + Desired profit) / Units of production
= ($51.50 + $16.63) / (0.8)
= $82.59

Thus, the closest target selling price based on the absorption costing approach for this product would be option C, $82.59.

(Appendix 12A)The Target Selling Price Based on the Absorption Costing