Diehl Company makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 52,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 8%.
Direct labor is a variable cost in this company.
-The selling price based on the absorption costing approach is closest to:
A) $78.50
B) $54.10
C) $79.15
D) $108.62

Question

Diehl Company makes a product with the following costs:  The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 52,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 8%.
Direct labor is a variable cost in this company.
-The selling price based on the absorption costing approach is closest to:
A) $78.50 
B) $54.10 
C) $79.15 
D) $108.62

Quizplus · Accepted Answer

First, let's calculate the total cost per unit using absorption costing:

Direct materials per unit = $19.50
Direct labor per unit = $13.50 (variable cost)
Variable manufacturing overhead per unit = $6.50
Fixed manufacturing overhead per unit = ($420,000 / 52,000) = $8.08
Total cost per unit = $19.50 + $13.50 + $6.50 + $8.08 = $47.58

Next, let's calculate the desired markup:

Return on investment = 8% of $420,000 = $33,600
Markup per unit = ($33,600 / 52,000) = $0.6462
Desired selling price = $47.58 + $0.6462 = $79.2262

Lastly, we want to round to the nearest cent to get the final answer:

Selling price based on absorption costing = $79.15 (closest to answer choice C)

Diehl Company Makes a Product with the Following Costs