Breaky Company is launching a new cleaning product for ceramic vases. The compan

Question

Breaky Company is launching a new cleaning product for ceramic vases. The company invests $2,900,000 in operating assets, such as production equipment, and plans to produce and sell 150,000 units per year. Breaky wants to make a return on investment of 35% each year. Breaky needs to know what price to charge for this product. Use the absorption costing approach to determine the markup necessary to make the desired return on investment. Round your answer to three decimals. Cost information is below:

Direct Materials $15.00 (per unit)
Direct Labor $9.50 (per unit)
Variable manufacturing overhead $3.00 (per unit)
Fixed manufacturing overhead $300,000 (total)
Variable selling and admin. expense $0.70 (per unit)
Fixed selling and admin. expense $80,000 (total)

Explanation / Answer

Unit Prod cost = DM+DL+Var Mfg OH + Fixed OH pu ie Unit Prod cost = $15+$9.50+$3.00+($300,000/150,000) = $29.50 Markup percentage on absorption cost = [(Required return on investment × Investment) + SG&A expenses] /(Units sales × Unit product cost) ie Markup = [(35%*$2900,000)+ (150000*$0.70+$80,000)]/(150,000*$29.50) ie Markup = $1200,000/$4425,000 = 27.119% SO Markup to cover selling, general, and administrative expenses and desired profit is 27.119% of unit manufacturing cost = $29.50*1.27119 = $37.50 pu

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