Reference no: EM132773431

Question - Messina Company wants to use absorption cost-plus pricing to establish the selling price for a new product. The company plans to invest $650,000 in operating assets that provide the capacity to make 30,000 units. Its required return on investment (ROI) in its operating assets is 20%. Messina's Accounting Department set a goal of producing and selling 20,000 units during the new product's first year of availability. It also provided the following cost estimates for the new product:

Direct materials $12

Direct labor $8

Variable manufacturing overhead $3

Fixed manufacturing overhead $100,000

Variable selling and administrative expenses $1

Fixed selling and administrative expenses $60,000

Required -

1. If the company plans to produce and sell 20,000 units, what is the absorption unit product cost for its new product?

2. At a planned sales volume of 20,000 units, what is the markup percentage on absorption cost for the new product?

3. Using absorption cost-plus pricing and assuming a planned sales volume of 20,000 units, what selling price would the company establish for its new product?

4. Using an absorption format, calculate Messina's net operating income if it actually produces and sells only 19,000 units (instead of 20,000 units) at the absorption cost-plus price from requirement 3. Calculate the return on investment (ROI) at this lower sales volume.

5. Assume that Messina's controller recommends raising the new product's selling price in an effort to achieve the desired ROI at the lower sales volume of 19,000 units.

a) What would become the new markup percentage?

b) What would become the new selling price?