Hill Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product:
The company uses the absorption costing approach to cost-plus pricing as described in the text.Required:a. Compute the markup on absorption cost.b. Compute the selling price.c. If the price computed in "b" above is charged, and costs turn out as projected, can the company be assured that no loss will be sustained on the new product? Explain.

Question

Hill Corporation is contemplating the introduction of a new product. The company has gathered the following information concerning the product:

The company uses the absorption costing approach to cost-plus pricing as described in the text.Required:a. Compute the markup on absorption cost.b. Compute the selling price.c. If the price computed in "b" above is charged, and costs turn out as projected, can the company be assured that no loss will be sustained on the new product? Explain.

Hunter Clements · Accepted Answer

Final Answer :

a.Markup percentage on absorption cost = [(Required return on investment (ROI) × Investment) + Selling and administrative expenses] ÷ [Unit product cost × Unit sales]= [(10% × $200,000) + $40,000] ÷ [$30 × 10,000]= $60,000 ÷ $300,000 = 20%b.

c.No, sales volume may be less than the 10,000 units projected annually, resulting in inadequate contribution margin to cover fixed costs, and a consequent loss for the company on the product.

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