Martin Company uses the absorption costing approach to cost-plus pricing. It is

Question

Martin Company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information:

Required:

1. Compute the markup percentage on absorption cost required to achieve the desired ROI.

2. Compute the selling price per unit. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

.

Maria Lorenzi owns an ice cream stand that she operates during the summer months in West Yellowstone, Montana. She is unsure how to price her ice cream cones and has experimented with two prices in successive weeks during the busy August season. The number of people who entered the store was roughly the same each week. During the first week, she priced the cones at $5.00 and 2,240 cones were sold. During the second week, she priced the cones at $5.50 and 1,800 cones were sold. The variable cost of a cone is $1.10 and consists solely of the costs of the ice cream and the cone itself. The fixed expenses of the ice cream stand are $2,035 per week.

Required:

1. What profit did Maria earn during the first week when her price was $5.00?

2. At the start of the second week, Maria increased her selling price by what percentage? What percentage did unit sales decrease? (Round your percentage answers to 2 decimal place.)

3. What profit did Maria earn during the second week when her price was $5.50?

4. What was Maria's increase (decrease) in profits from the first week to the second week?

Number of units to be produced and sold each year 12,500 Unit product cost $ 24 Estimated annual selling and administrative expenses $ 45,000 Estimated investment required by the company $ 250,000 Desired return on investment (ROI) 12 %

Explanation / Answer

SOLUTION

Question -1

1. Markup percentage on absorption cost

= [(Required ROI * Investment) + Selling and administrative expenses] / (Unit product cost * Unit sales)

= [(12% * $250,000) + $45,000] / ($24 * 12,500)

= ($30,000 + $45,000) / ($300,000)

= $75,000 / $300,000 = 25%

2. Absorption cost based selling price

= (1 + Markup percentage on absorption cost) *Unit product cost

= (1 + 0.25) * $24

= 1.25 * $24

= $30

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