Jaakola Corporation makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 28,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 15%. The markup on absorption cost would be closest to:
A) 27.1%
B) 29.9%
C) 84.3%
D) 15.0%

Question

Jaakola Corporation makes a product with the following costs:  The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 28,000 units per year. The company has invested $360,000 in this product and expects a return on investment of 15%. The markup on absorption cost would be closest to:
A) 27.1% 
B) 29.9% 
C) 84.3% 
D) 15.0%

Quizplus · Accepted Answer

Selling and administrative expenses = ($4.90 per unit × 28,000 units) + $319,200 = $456,400
 11eacbfc_c82c_af0f_8ffe_b389b3409e2d_TB7552_00 Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(15% × $360,000) + $456,400] ÷ ($61.00 per unit × 28,000 units)
= [$54,000 + $456,400] ÷ $1,708,000
= $510,400 ÷ $1,708,000 = 29.9% (rounded)

Jaakola Corporation Makes a Product with the Following Costs