Eckhart Company uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 64,000 units next year, the unit product cost of a particular product is $13.60. The company's selling and administrative expenses for this product are budgeted to be $729,600 in total for the year. The company has invested $460,000 in this product and expects a return on investment of 11%.
-The selling price based on the absorption costing approach for this product would be closest to:
A) $25.00
B) $25.79
C) $15.10
D) $47.41

Question

Quizplus · Accepted Answer

The unit product cost includes both variable and fixed manufacturing costs, as well as a portion of selling and administrative expenses. Therefore, we can calculate the unit product cost as:

Unit product cost = Total budgeted manufacturing cost / Budgeted production
Unit product cost = ($13.60 * 64,000 units) + ($729,600 / 64,000 units)
Unit product cost = $11.84 + $11.40
Unit product cost = $23.24

To this, we add the desired return on investment:

Selling price = Unit product cost + (ROI * Investment) / Budgeted production
Selling price = $23.24 + (0.11 * $460,000) / 64,000 units
Selling price = $23.24 + $0.785
Selling price = $25.025

Rounding to the nearest cent gives us a selling price of $25.79, which is closest to answer choice B.

Eckhart Company Uses the Absorption Costing Approach to Cost-Plus Pricing