QUESTION 1

1. You are advising the management at the company ABC regarding their pricing decisions in relation to a new product. Existing information is as follows:

Direct materials $4 per unit; direct labor $3 per unit; variable manufacturing overhead $5 per unit; variable selling and administrative expenses $2 per unit; fixed manufacturing overhead expenses $$40,000; and fixed selling and administrative expenses $70,000.

There is an expectation that company will sell 20,000 units.

Required: (Please note that you should answer the questions in Word offline and please do NOT answer in the Blackboard!!!)

1. Determine the unit product cost if company uses an absorption costing approach in its cost-plus pricing. (2 marks)
2. Determine the target selling price given that company uses a 40 percent markup percentage. (2 marks)
3. It has been brought to your attention that company is making an investment of $100,000 in the making, marketing, and distribution of the 20,000 units of their new product. The management require a 50 percent return on this investment. Calculate the markup percentage on absorption costing given this information. (2 marks)
4. If the company only sells 15,000 units at $21 per unit what would be the return on investment? (2 marks)
5. Describe a limitation of the absorption costing approach to costing. (2 marks)