The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product:
Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%.
-The selling price would be closest to:
A) $28.71
B) $26.50
C) $22.00
D) $32.67

Question

The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product:
  Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%.
-The selling price would be closest to:
A) $28.71 
B) $26.50 
C) $22.00 
D) $32.67

Quizplus · Accepted Answer

11ea7761_1646_72fa_81a5_2591f1a61f83_TB2580_00 Selling and administrative expenses = ($3 per unit × 60,000 units) + $300,000 = $480,000
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(25% × $650,000) + $480,000] ÷ ($18.00 per unit × 60,000 units)
= [($162,500) + $480,000] ÷ ($1,080,000)
= [$642,500] ÷ $1,080,000 = 59.5% (rounded)
Absorption cost based selling price = (1 + Markup percentage on absorption cost) × Unit product cost
= (1 + 0.595) × $18.00 = $28.71

The Management of Musselman Corporation Would Like to Set the Selling