(a) Stent Corporation needs to set a target price for its newly designed product

Question

(a)

Stent 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 $ 22 Direct labor $ 35 Variable manufacturing overhead $ 10 Fixed manufacturing overhead $ 2,010,890 Variable selling and administrative expenses $ 5 Fixed selling and administrative expenses $ 970,830
The costs shown above are based on a budgeted volume of 80,500 units produced and sold each year. Stent 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 accounting department provides information under both approaches using a markup of 52% on absorption cost and a markup of 94.18% on variable cost.

Explanation / Answer

Under absorption costing, Manufacturing costs are considered in calculating the cost per unit. Selling costs are excluded and the fixed overhead are recovered on the basis of normal quantity produced or budgeted quantity produced.

Fixed manufacturing overhead per unit = Overhead / Quantity produced

= $2,010,890 / 80,500 = $24.98 per unit.

So, absorption cost per unit = Direct material + Direct labor + Variable manufacturing overhead per unit + Fixed manufacturing overhead per unit

= $22 + $35 + $10 + $24.98 = $91.98

So, target price = Cost + Markup = $91.98 + $91.98 x 52% = $139.81 per unit.

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.