Question

Sirhuds Inc., a maker of smart watches, reports the information below on its product. The company uses absorption costing and has a target markup of 40% of absorption cost per unit. Compute the target selling price per unit under absorption costing.

Direct material cost	\(100 per unit
Direct labor cost	\)30 per unit
Variable overhead cost	\(8 per unit
Fixed overhead cost	\)600,000 per year
Variable selling and administrative expenses	\(3 per unit
Fixed selling and administrative expenses	\)120,000 per year
Expected production (and sales)	50,000 units per year

Short answer

The target selling price per unit under absorption costing is$217.56.

Step-by-step solution

Meaning of Selling Price 

In business terms, selling price refers to the predetermined consideration price for a particular product or service. A manufacturer fixes the selling price of its products byadding profit to the actual cost incurred for such a product.

Computation of target selling price 

$\begin{array}{rcl}\text{Target selling price}& =& \text{Absorption cost per unit}+\text{Target markup}\\ & =& \$155.40+\$62.16\\ & =& \$217.56\\ & & \end{array}$

Computation of cost per unit:

Particulars	Amounts ($)
Direct material cost	100
Direct labor cost	30
Variable overhead cost	8
Variable selling and administrative expenses	3
Fixed overhead cost (600000/50000)	12
Fixed selling and administrative expenses (120000/50000)	2.40
Absorption cost per unit	$155.40

Computation of target markup per unit:

$\begin{array}{rcl}\text{Target markup}& =& \text{Absorption cost per unit}\times \text{Percentage of target markup}\\ & =& \$155.40\times \frac{40}{100}\\ & =& \$62.16\\ & & \end{array}$