Question

Quamma Corporation makes a product that has the following costs: Per Unit Per Year Direct materials $ 18.50 Direct labor $ 16.10 Variable manufacturing overhead $ 3.40 Fixed manufacturing overhead $ 826,000 Variable selling and administrative expenses $ 5.10 Fixed selling and administrative expenses $ 574,000 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 35,000 units per year. The company has invested $740,000 in this product and expects a return on investment of 19%. Required: a. Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places.) b. Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places.)

Answer 1

a. $2,156,000

b. $409,640

c. $2,565,640

Step-by-step explanation:

First Calculate the Product Cost

Hint : Include Both Variable and Manufacturing Cost - Because Quamma Corporation uses absorption costing approach. Non manufacturing costs are not included in product cost.

Calculation of Total Product Cost

Direct materials ($ 18.50 × 35,000) $647,500

Direct labor ($ 16.10 × 35,000) $563,500

Variable manufacturing overhead ($ 3.40 × 35,000) $119,000

Fixed manufacturing overhead $826,000

Total Product Cost $2,156,000

Markup on absorption cost

Markup on absorption cost ($2,156,000 × 19%) = $409,640

Calculation of Selling Price

Total Product Cost $2,156,000

Add Markup on absorption cost $409,640

Selling Price $2,565,640