Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Messina Company wants to use absorption cost-plus pricing to establish the selling price for a new product. The company plans to invest $650,000 in operating

Messina Company wants to use absorption cost-plus pricing to establish the selling price for a new product. The company plans to invest $650,000 in operating assets that provide the capacity to make 30,000 units. Its required return on investment (ROI) in its operating assets is 20%. Messinas Accounting Department set a goal of producing and selling 20,000 units during the new products first year of availability. It also provided the following cost estimates for the new product:

Direct materials $ 12
Direct labor $ 8
Variable manufacturing overhead $ 3
Fixed manufacturing overhead $ 100,000
Variable selling and administrative expenses $ 1
Fixed selling and administrative expenses $ 60,000

Required:

1. If the company plans to produce and sell 20,000 units, what is the absorption unit product cost for its new product? (Round your answer to 2 decimal places.)

2. At a planned sales volume of 20,000 units, what is the markup percentage on absorption cost for the new product? (Round your answer to 1 decimal place.)

3. Using absorption cost-plus pricing and assuming a planned sales volume of 20,000 units, what selling price would the company establish for its new product? (Round intermediate calculations and final answer to 2 decimal places.)

4. Using an absorption format, calculate Messinas net operating income if it actually produces and sells only 19,000 units (instead of 20,000 units) at the absorption cost-plus price from requirement 3. Calculate the return on investment (ROI) at this lower sales volume. (Round your intermediate calculations to 2 decimal places. Round final answer to 1 decimal place.)

5. Assume that Messinas controller recommends raising the new products selling price in an effort to achieve the desired ROI at the lower sales volume of 19,000 units.

a) What would become the new markup percentage? (Round your intermediate calculations to 2 decimal places. Round final answer to 1 decimal place.)

b) What would become the new selling price? (Round your intermediate percent to 1 decimal place. Round other intermediate calculations and final answer to 2 decimal places.)

1. Unit product cost
2. Markup percentage on absorption cost %
3. Selling price per unit
4. Return on investment %
5a. New markup percentage %
5b. New selling price

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing A Practical Approach

Authors: Fiona Campbell, Robyn Moroney, Jane Hamilton, Valerie Warren

2nd Canadian edition

9781118377901, 1118377907, 1119048095, 978-1118849415

More Books

Students also viewed these Accounting questions