Hansen Corporation needs to set a target price for its newly designed product Ev

Question

Hansen Corporation needs to set a target price for its newly designed product EverReady. The following data relate to this new product. Per Unit Total Direct materials $18.00 Direct labor $44.00 Variable manufacturing overhead $11.00 Fixed manufacturing overhead $1,660,000 Variable selling and administrative expenses $7.00 Fixed selling and administrative expenses $1,044,140 The costs shown above are based on a budgeted volume of 83,000 units produced and sold each year. Hansen uses cost-plus pricing methods to set its target selling price. Because some managers prefer absorption-cost pricing and others prefer variable-cost pricing, the department provides information under both approaches using a markup of 48% on absorption cost and a markup of 72.05% on variable cost. Compute the target price for one unit of EverReady using absorption-cost pricing. $? Compute the target price for one unit of EverReady using variable-cost pricing. $?

Explanation / Answer

Absorption cost pricing

Direct materials $18.00

Direct labor $44.00

Variable manufacturing overhead $11.00

Fixed manufacturing overhead $1,660,000/83000 = $20.00

Variable selling and administrative expenses $7.00

Fixed selling and administrative expenses $1,044,140/83000 = $12.58

Total product cost: $112.58

Target price = 112.58 x 1.48 = $166.62

Variable cost pricing

Direct materials $18.00

Direct labor $44.00

Variable manufacturing overhead $11.00

Variable selling and administrative expenses $7.00

Total product cost: $80.00

Target price = 80.00 x 1.7205 = $137.64

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