Qualls Corporation Makes a Product That Has the Following Costs

question 21

Essay

Qualls Corporation makes a product that has the following costs: $\begin{array}{lrr}&\text { Per Unit } & \text { Per Year } \\\text {Direct materials }&\$ 17.30 & \\\text {Direct labor }&\$ 12.90 & \\\text {Variable manufacturing overhead }&\$ 4.20 \\\text { Fixed manufacturing overhead. }&&\$916,800\\\text { Variable selling and administrative expenses }&\$2.00\\\text { Fixed selling and administrative expenses }&&\$907,200\end{array}$ The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 48,000 units per year.
The company has invested $360,000 in this product and expects a return on investment of 15%.
Required:
a. Compute the markup on absorption cost.
b. Compute the selling price of the product using the absorption costing approach.
c. Assume that every 10% increase in price leads to a 13% decrease in quantity sold. Assuming no change in cost structure and that direct labor is a variable cost, compute the profit-maximizing price.

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