Raymond Company estimates that an investment of $\$ 800,000$ would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be:
$\begin{array}{|l|r|}
\hline \text { Variable Costs (per unit): } & \
\hline \text { Materials, Labour, and Manufacturing Overhead } & \$ 30 \
\hline \text { Selling and Administrative } & \$ 5 \
\hline \text { Fixed Cost per Year: } & \
\hline \text { Manufacturing Overhead } & \$ 300,000 \
\hline \text { Selling and Administrative } & \$ 240,000 \
\hline
\end{array}$
The company requires a $20 \%$ return on the investment in all products. The company uses the absorption costing approach to pricing.
- What is the target selling price based on the absorption costing approach?
A) $48.38.
B) $51.38.
C) $52.50.
D) $56.25.

Question

Quizplus · Accepted Answer

The target selling price based on the absorption costing approach includes variable costs, fixed costs, and the desired profit. Variable costs per unit are $35 ($30 for materials, labor, and manufacturing overhead + $5 for selling and administrative). Fixed costs per year are $540,000 ($300,000 for manufacturing overhead + $240,000 for selling and administrative). The desired return on investment (ROI) is 20% of $800,000, which is $160,000. To find the target selling price per unit, add the total costs and desired profit, then divide by the number of units.Total variable costs for 40,000 units = 40,000 units * $35 = $1,400,000Total costs (variable + fixed) = $1,400,000 + $540,000 = $1,940,000Total desired profit = $160,000Total required revenue = $1,940,000 + $160,000 = $2,100,000Target selling price per unit = $2,100,000 / 40,000 units = $52.50

Raymond Company Estimates That an Investment Of $800,000\$ 800,000$800,000 Would Be Necessary to Produce and Sell 40,000 Units of Be

Raymond Company Estimates That an Investment Of $\$ 800,000$ Would Be Necessary to Produce and Sell 40,000 Units of Be