Riley Company Makes a Product That Has the Following Costs

Essay

Riley Company makes a product that has the following costs:
$\begin{array}{|l|r|r|}\hline & \text { Per unit } & \text { Per year } \\\hline \text { Direct materials } & \$ 27.00 & \\\hline \text { Direct labour } & 22.00 & \\\hline \text { Variable manufacturing overhead } & 14.00 & \\\hline \text { Fixed manufacturing overhead } & & \$ 1,080,000 \\\hline \text { Variable SG\&A expenses } & 12.00 & \\\hline \text { Fixed SG\&A expenses } & & 960,000 \\\hline\end{array}$
The company uses the absorption costing approach to cost-plus pricing.The pricing calculations are based on budgeted production and sales of 48,000 units per year.
The company has invested $500,000 in this product and expects a return on investment of 15%.
Required:
a)Compute the markup on absorption cost.
b)Compute the target selling price of the product using the absorption costing approach.