Aldean Company wants to use absorption cost-plus pricing to set the selling pric

Question

Aldean Company wants to use absorption cost-plus pricing to set the selling price on a new product. The company plans to invest $150,000 in operating assets to produce and sell 15,000 units. Its required return on investment (ROI) in its operating assets is 18%. The accounting department has provided cost estimates for the new product as shown below:

Required:

1. What is the unit product cost for the new product? (Round intermediate calculations and final answer to 2 decimal places.)

2. What is the markup percentage on absorption cost for the new product? (Round intermediate calculations to 2 decimal places.)

3. What selling price would the company establish for its new product using a markup percentage on absorption cost? (Round intermediate calculations and final answer to 2 decimal places.)

Per Unit Total Direct materials $ 7.60 Direct labor $ 5.60 Variable manufacturing overhead $ 2.60 Fixed manufacturing overhead $ 113,250 Variable selling and administrative expenses $ 1.60 Fixed selling and administrative expenses $ 68,085

Explanation / Answer

Answer 1 Unit product cost for the new product Per Unit Cost Direct Materials $7.60 Direct Labour $5.60 Variable Manufacturing Overhead $2.60 Fixed Manufacturing Overhead ($113250/15000 units) $7.55 Unit Product Cost   $23.35 Answer 2 Required Net Income = 18% of Investment in Operating assets = 18%*$150000 = $27,000 Required Product Margin = Required net Income + Selling and administrative expenses = $27000 + [(15000 units * $1.60)+$68085] = $119085 Required product margin per unit = $119085 / 15000 units = $7.939 Markup percentage on absorption cost for the new product = Required product margin per unit / Unit product cost = $7.939/$23.35 = 34% Answer 3 Selling price per unit = Required product margin per unit + Unit product cost = $7.939 + $23.35 = $31.29 per unit

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