Quamma Corporation makes a product that has the following costs: Per UnitPer Year Direct materials$18.50 Direct labor$16.10 Variable manufacturing overhead$3.40 Fixed manufacturing overhead $826,000 Variable selling and administrative expenses$5.10 Fixed selling and administrative expenses $574,000 The company uses the absorption costing approach to cost-plus pricing as described in the text. The pricing calculations are based on budgeted production and sales of 35,000 units per year. The company has invested $740,000 in this product and expects a return on investment of 19%. Required: a. Compute the markup on absorption cost. (Round your intermediate and final answer to 2 decimal places.) b. Compute the selling price of the product using the absorption costing approach. (Round your intermediate and final answer to 2 decimal places.)

a. $2,156,000

b. $409,640

c. $2,565,640

Explanation:

First Calculate the Product Cost

Hint : Include Both Variable and Manufacturing Cost - Because Quamma Corporation uses absorption costing approach. Non manufacturing costs are not included in  product cost.

Calculation of Total Product Cost

Direct materials ($ 18.50 × 35,000)                                     $647,500

Direct labor ($ 16.10 × 35,000)                                             $563,500

Variable manufacturing overhead ($ 3.40 × 35,000)          $119,000

Fixed manufacturing overhead                                           $826,000  

Total Product Cost                                                             $2,156,000

Markup on absorption cost

Markup on absorption cost ($2,156,000 × 19%) = $409,640

Calculation of Selling Price

Total Product Cost                                      $2,156,000

Add Markup on absorption cost                   $409,640

Selling Price                                                $2,565,640

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