Chapter AA, Problem 6P

To determine

Concept Introduction:

Absorption costing approach: Absorption costing is a cost accounting method under which all of the manufacturing costs including direct materials, direct labor, fixed and variable overheads are absorbed by the units produced. Absorption costing is also called full costing method.

Cost-plus pricing: Cost-plus pricing is the simple cost-based pricing method to determine the prices of goods or services. Under this method first add the direct material cost, the direct labor cost and the overhead cost to calculate the cost of production and a markup percentage is added to the total cost to decide the selling price of the goods or services.

Return on Investment (ROI): Return on investment is the ratio between profit or loss and amount of investment made. It is represented in percentage terms.

(1)

To prepare:

The Standard cost card for a single surfboard.

To determine

(2a)

To compute:

The markup required on the surfboard to achieve an 18% return on investment.

To determine

(2b)

To prepare:

The price quotation sheet for a single surfboard.

To determine

(2c)

To prepare:

The income statement for the first year of activity and calculate the ROI.

To determine

(3a)

To compute:

The number of units required to be sold to achieve 18% ROI.

To determine

(3b)

To compute:

The number of units required to be sold to achieve break-even.