Kircher, Inc., manufactures a product with the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 24.90 & \
\text {Direct labor }&\$ 13.90 & \
\text {Variable manufacturing overhead }&\$ 2.10 \\text { Fixed manufacturing overhead. }&&\$1,182,600\\text { Variable selling and administrative expenses }&\$2.00\\text { Fixed selling and administrative expenses }&&\$1,166,400
\end{array}$ 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 81,000 units per year. The company has invested $220,000 in this product and expects a return on investment of 15%.
The selling price based on the absorption costing approach would be closest to:
A)$71.90
B)$72.31
C)$53.29
D)$93.67

Question

Quizplus · Accepted Answer

To find the selling price using absorption costing, calculate the total cost per unit including fixed costs, then add the desired profit. Total cost per unit = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead per unit + Variable selling and administrative expenses. Fixed manufacturing overhead per unit = $1,182,600 / 81,000 units. Total cost per unit = $24.90 + $13.90 + $2.10 + ($1,182,600 / 81,000) + $2.00. Desired profit per unit = (15% of $220,000) / 81,000 units. Selling price = Total cost per unit + Desired profit per unit.

Kircher, Inc The Company Uses the Absorption Costing Approach to Cost-Plus Pricing