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Category > Accounting Posted 17 May 2017 My Price 10.00

Absorption Costing Approach to Setting Prices

PROBLEM A–5 Standard Costs; Absorption Costing Approach to Setting Prices [LO2]

Euclid Fashions, Inc., is introducing a sports jacket. A standard cost card has been prepared for the new jacket, as shown below:

Direct materials . . . . . . . . . . . . . . . . . . . . . . .

2.0 yards

$4.60 per yard

$  9.20

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . .

1.4 hours

$10.00 per hour

14.00

Manufacturing overhead (1⁄6 variable) . . . . . .

1.4 hours

$12.00 per hour

  16.80

Total standard cost per jacket . . . . . . . . . . . .

 

 

$40.00

 

 

The following additional information relating to the new jacket is available:

a.       The only variable selling and administrative cost will be $4 per jacket for shipping. Fixed sell- ing and administrative costs will be (per year):

 

 

Salaries . . . . . . . . . . . . . . . . . . . . .

$  90,000

Advertising and other . . . . . . . . . .

384,000

Total . . . . . . . . . . . . . . . . . . . . . . . .

$474,000

 

 

b.       Because the company manufactures many products, no more than 21,000 direct labor-hours per year can be devoted to production of the new jackets.

c.       An investment of $900,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment. The company’s required rate of return is 24%.

d.       Manufacturing overhead costs are allocated to products on the basis of direct labor-hours.

Required:

1.       Assume that the company uses the absorption approach to cost-plus pricing.

a.       Compute the markup that the company needs on the jackets to achieve a 24% ROI if it sells all of the jackets it can produce using 21,000 hours of labor time.

b.       Using the markup you have computed, prepare a price quote sheet for a single jacket.

c.        Assume that the company is able to sell all of the jackets that it can produce. Prepare an income statement for the first year of activity, and compute the company’s ROI for the year on the jackets, using the ROI formula from Chapter 11.

2.       After marketing the jackets for several years, the company is experiencing a falloff in demand due to an economic recession. A large retail outlet will make a bulk purchase of jackets if its label is sewn in and if an acceptable price can be worked out. What is the minimum acceptable price for this order?

 

Answers

Alpha Geek
(8)
Status NEW Posted 17 May 2017 09:05 AM My Price 10.00

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Attachments

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