Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 units are produced and sold each year: Nance Corporation uses the absorption costing approach to cost-plus pricing as described in the text.
Assume that the company has not yet determined a markup to use on the new product. The new product would require an investment of $1,200,000. The company requires a 25% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:
A) 70.0%
B) 50.0%
C) 83.3%
D) 63.3%

Question

Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 units are produced and sold each year:  Nance Corporation uses the absorption costing approach to cost-plus pricing as described in the text.
Assume that the company has not yet determined a markup to use on the new product. The new product would require an investment of $1,200,000. The company requires a 25% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:
A) 70.0% 
B) 50.0% 
C) 83.3% 
D) 63.3%

Quizplus · Accepted Answer

11eacbfc_c834_9e7c_8ffe_3f1cf694516b_TB7552_00 Selling and administrative expenses = ($2 per unit × 40,000 units) + $120,000 = $200,000
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(0.25 × $1,200,000) + $200,000] ÷ ($15 per unit × 40,000 units)
= [($300,000) + $200,000] ÷ ($600,000)
= $500,000 ÷ $600,000 = 83.3%

Nance Corporation Is About to Introduce a New Product