Diedrich 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 67,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 12%.
Direct labor is a variable cost in this company.
The markup on absorption cost is closest to:
A) 12.0%
B) 51.0%
C) 49.6%
D) 126.7%

Question

Diedrich 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 67,000 units per year.
The company has invested $420,000 in this product and expects a return on investment of 12%.
Direct labor is a variable cost in this company.
The markup on absorption cost is closest to:
A) 12.0% 
B) 51.0% 
C) 49.6% 
D) 126.7%

Quizplus · Accepted Answer

11eacbfc_c834_0238_8ffe_bd1d3e6a7ea8_TB7552_00 Selling and administrative expenses = ($4.20 per unit × 67,000 units) + $1,581,200 = $1,862,600
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(12% × $420,000) + $1,862,600] ÷ ($56.00 per unit × 67,000 units)
= [($50,400) + $1,862,600] ÷ ($3,752,000)
= [$1,913,000] ÷ $3,752,000 = 51.0%

Diedrich Corporation Makes a Product with the Following Costs