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Green Hornet Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product: Number of units to be produced and sold each yea

Question:

Green Hornet Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product:

Number of units to be produced and sold each year	16,000
Investment required by the company	$400,000
Expected unit product cost	$30
Expected annual selling and administrative expenses	$100,000
Desired rate of return on investment	20%

The company uses the absorption costing approach to cost-plus pricing.

Required:

a. Compute the markup on absorption cost.

b. Compute the selling price.

Answers (1)

Nada April 2, 2023 в 23:43

a. The markup on absorption cost is calculated as follows: Markup on Absorption Cost = (Desired Rate of Return on Investment / 100) x Total Production Cost per Unit Total Production Cost per Unit = Expected Unit Product Cost + (Expected Annual Selling and Administrative Expenses / Number of Units to be Produced and Sold Each Year) Total Production Cost per Unit = $30 + ($100,000 / 16,000) = $36.25 Markup on Absorption Cost = (20 / 100) x $36.25 = $7.25 b. The selling price is calculated as follows: Selling Price = Total Production Cost per Unit + Markup on Absorption Cost Selling Price = $36.25 + $7.25 = $43.50 Therefore, the selling price for the new product is $43.50. This price includes the total cost of production as well as the desired rate of return on investment.

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