P9.64B (LO 3, 4) Santana Furniture Inc. is setting a target price on its newly designed leather recliner sofa. Cost data for the sofa at a budgeted volume of 3,000 units are as follows:

		Per Unit		Total
Direct materials		$140
Direct labour		80
Variable manufacturing overhead		40
Fixed manufacturing overhead				$180,000
Variable selling and administrative expenses		20
Fixed selling and administrative expenses				90,000

Santana Furniture uses cost-plus pricing to provide a 30% ROI on its stuffed furniture line. A total of $700,000 in assets has been committed to the production of the new leather recliner sofa.

Instructions

1. Calculate the markup percentage under the absorption-cost approach that will allow Santana Furniture to realize its desired ROI.

   a. 37.5%

2. Calculate the target price of the sofa under absorption-cost pricing, and show proof that the desired ROI is realized.
3. Calculate the markup percentage under the variable-cost approach that will allow Santana Furniture to realize its desired ROI.

   c. 57.143%

4. Calculate the target price of the sofa under variable-cost pricing, and show proof that the desired ROI is realized.
5. Since both absorption-cost pricing and variable-cost pricing produce the same target price and provide the same ROI, why do both methods exist? Isnt one method clearly better than the other?