Mercer Corporation estimates that an investment of $650,000 would be necessary to produce and sell 60,000 units of a new product each year. Other costs associated with the new product would be: The company requires a 25% return on the investment in all products. The company uses the absorption costing approach costing to pricing as described in the text.
The markup percentage on the new product would be closest to:
A) 51.0%
B) 12.5%
C) 24.0%
D) 59.5%

Question

Mercer Corporation estimates that an investment of $650,000 would be necessary to produce and sell 60,000 units of a new product each year. Other costs associated with the new product would be:  The company requires a 25% return on the investment in all products. The company uses the absorption costing approach costing to pricing as described in the text.
The markup percentage on the new product would be closest to:
A) 51.0% 
B) 12.5% 
C) 24.0% 
D) 59.5%

Quizplus · Accepted Answer

11eacbfc_c835_d707_8ffe_6594a3c9c03e_TB7552_00 Selling and administrative expenses = ($3 per unit × 60,000 units) + $300,000 = $480,000
Markup percentage on absorption cost = [(Required ROI × Investment) + Selling and administrative expenses] ÷ (Unit product cost × Unit sales)
= [(25% × $650,000) + $480,000] ÷ ($18.00 per unit × 60,000 units)
= [($162,500) + $480,000] ÷ ($1,080,000)
= [$642,500] ÷ $1,080,000 = 59.5% (rounded)

Mercer Corporation Estimates That an Investment of $650,000 Would Be