Mercer Company is planning the introduction of a new product. The following information relating to the product has been assembled:
$\begin{array}{|l|r|}
\hline \text { Variable Costs (per unit): } & \
\hline \text { Materails, Labour, and Overhead } & \$ 12 \
\hline \text { Selling and Administrative } & \$ 3 \
\hline \text { Fixed Costs per Year: } & \$ 360,000 \
\hline \text { Manufacturing Overhead } & \$ 300,000 \
\hline \text { Selling and Administrative } & \$ 650,000 \
\hline \text { Investment Required } & 25 \% \
\hline \text { Required Rate of Return } & 60,000 \
\hline \text { Total Units to Be Produced and Sold Each Year } & \
\hline
\end{array}$
The company uses the absorption costing approach to pricing.
- The target selling price for one unit of the new product is closest to which of the following?
A) $22.00.
B) $26.50.
C) $28.71.
D) $32.67.

Question

Quizplus · Accepted Answer

To find the target selling price under the absorption costing approach, we first calculate the total cost per unit, including both variable and fixed costs, and then add the desired profit margin. The variable cost per unit is $12 (materials, labor, and overhead) + $3 (selling and administrative) = $15. The total fixed costs are $360,000 (fixed costs per year) + $300,000 (manufacturing overhead) + $650,000 (selling and administrative) = $1,310,000. The question does not specify the total units to be produced and sold each year, but it's necessary to include the required rate of return (profit) in the calculation. Assuming the "Required Rate of Return" of $60,000 is the desired profit, we add this to the total costs to determine the total revenue needed. Without the production volume, we cannot accurately calculate the price per unit based on the given data. However, the closest approach with the provided information would involve dividing the total fixed costs and desired profit by the number of units, then adding the variable cost per unit. Since the number of units is missing, we cannot complete this calculation accurately, but the correct approach involves considering both variable and fixed costs plus the desired profit to find the target selling price.

Mercer Company Is Planning the Introduction of a New Product