TB MC Qu. 12A-32 Kirgan, Inc., manufactures a product with the following costs ... Kirgan, Inc., manufactures a product with the following costs: Per Unit Per Year Direct materials $ 25.10 Direct labor $ 14.10 Variable manufacturing overhead $ 2.30 Fixed manufacturing overhead $ 1,228,400 Variable selling and administrative expenses $ 2.20 Fixed selling and administrative expenses $ 1,203,800 The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 83,000 units per year. The company has invested $240,000 in this product and expects a return on investment of 15%. The selling price based on the absorption costing approach would be closest to:a. $750.82 per unit b. $677.62 per unit c. $371.35 per unit d. $526.87 per unit

$73.43

Explanation:

The computation of selling price based on the absorption costing is shown below:-

Fixed Manufacturing overhead = $1,228,400 ÷ 83,000

= $14.8

Units products cost = Direct material + Direct labor + Variable manufacturing overhead + Fixed Manufacturing overhead

= $25.10 + $14.10 + $2.30 + $14.8

= $56.3

Selling and administrative expenses = Variable selling and administrative expenses ×Sales per unit + Fixed selling and administrative expenses

= $2.20 × 83,000 + $1,203,800

= $1,386,400

Markup percentage on absorption = ((Required ROI × Investment) + Selling and administrative expenses) ÷ (Unit product cost × Unit sales)

= ((15% × $240,000) + $1,386,400) ÷ ($56.3 × 83,000)

= ($36,000 + $1,386,400) ÷ $4,672,900

= $1,422,400 ÷ $4,672,900

= 30.44%

Absorption cost based on selling price = ( 1 + Markup percentage on absorption) × Units product cost

= (1 + 30.44%) × $56.3

= 1.3044 × $56.30

= $73.43

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