The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product: Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%.
The markup percentage on absorption cost is closest to:
A) 25%
B) 34%
C) 15%
D) 10%

Question

The management of Musselman Corporation would like to set the selling price on a new product using the absorption costing approach to cost-plus pricing. The company's accounting department has supplied the following estimates for the new product:  Management plans to produce and sell 9,000 units of the new product annually. The new product would require an investment of $1,305,000 and has a required return on investment of 10%.
The markup percentage on absorption cost is closest to:
A) 25% 
B) 34% 
C) 15% 
D) 10%

Quizplus · Accepted Answer

11eacbfc_c835_3ac3_8ffe_cd1c8bed3464_TB7552_00 Selling and administrative expenses = $3 per unit × 9,000 units + $72,000 = $99,000
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(10% × $1,305,000) + $99,000] ÷ ($75 per unit × 9,000 units)
= [($130,500) + $99,000] ÷ ($675,000)
= [$229,500] ÷ $675,000 = 34%

The Management of Musselman Corporation Would Like to Set the Selling