The Management of Archut Corporation Would Like to Set the Selling

question 67

Essay

The management of Archut 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 $3,002,400 and has a required return on investment of 10%.
Required:
a.Determine the unit product cost for the new product.
b.Determine the markup percentage on absorption cost for the new product.
c.Determine the selling price for the new product using the absorption costing approach.
$\begin{array}{c}\begin{array}{lll}\\ \text {Direct materials....................................................}\\ \text {Direct labor...........................................................}\\ \text {Variable manufacturing overhead..........................}\\ \text {Fixed manufacturing overhead...............................}\\ \text {Variable selling and administrative expenses..........}\\ \text {Fixed selling and administrative expenses..............}\end{array}\begin{array}{rr}\text { Per Unit } & \text { Per Year } \\\$ 35 & \\\$ 14 & \\\$ 9 & \\& \$ 270,000 \\\$ 1 & \\& \$ 63,000 \end{array}\end{array}$

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Definitions:

Fixed Manufacturing Overhead

Indirect production costs that remain constant regardless of the volume of production, such as salaries of managers and depreciation of factory equipment.

Budget Variance

Budget Variance is the difference between the budgeted or planned amounts and the actual amounts spent or earned, used to evaluate financial performance.

Standard Hours

The expected amount of time required to produce a single unit or a batch of units under normal operating conditions.

Predetermined Overhead Rate

The rate used to allocate manufacturing overhead to individual products or job orders, calculated before the period begins based on estimated costs and activity levels.