Figure 10-3
Farr Company had the following information: $\begin{array}{lcc}
\text { Revenues } & & £ 400,000 \
\text { Cost of goods sold: } &£ 100,000 & \
\text { Direct materials } & 50,000\
\text { Overhead } & 50,000 & 200,000 \
\text { Gross profit } & & £ 200,000 \
\text { Selling and administrative expenses } & & 75,000 \
\text { Operating income } & & £ 125,000 \

\end{array}$
-Refer to Figure 10-3. What is the mark up based on prime costs?
A)300.0%
B)133.3%
C)50.0%
D)166.7%

Question

Figure 10-3
Farr Company had the following information: $\begin{array}{lcc}
\text { Revenues } & & £ 400,000 \
\text { Cost of goods sold: } &£ 100,000 & \
\text { Direct materials } &   50,000\
 \text { Overhead } & 50,000 & 200,000 \
 \text { Gross profit } & & £ 200,000 \
\text { Selling and administrative expenses } & & 75,000 \
 \text { Operating income } & & £ 125,000 \

\end{array}$
-Refer to Figure 10-3. What is the mark up based on prime costs?
A)300.0%
B)133.3%
C)50.0%
D)166.7%

Quizplus · Accepted Answer

The formula to calculate the markup based on prime cost is: 
Markup % = (Total Selling Price - Total Prime Cost) / Total Prime Cost * 100

Using the information given in the figure:
Total Prime Cost = Direct Materials + Direct Labor + Factory Overhead
Total Prime Cost = 80,000 + 30,000 + 20,000
Total Prime Cost = 130,000

Total Selling Price = (Total Prime Cost / ((100 - Desired Markup%) / 100))
200,000 = (130,000 / ((100 - Desired Markup%) / 100))
2 = (100 - Desired Markup%) / 100
1 + Desired Markup% / 100 = 2
Desired Markup% / 100 = 1
Desired Markup% = 100

Markup % = (200,000 - 130,000) / 130,000 * 100
Markup % = 70,000 / 130,000 * 100
Markup % = 53.85%

Therefore, the closest answer is D) 166.7% which is the reciprocal of the markup percentage. 
Reciprocal of markup percentage = 1 / Markup percentage * 100
Reciprocal of 53.85% = 1 / 53.85% * 100
Reciprocal of 53.85% = 1.857 or 166.7% (rounded to one decimal place)

Figure 10-3 Farr Company Had the Following Information -Refer to Figure 10-3

Figure 10-3
Farr Company Had the Following Information -Refer to Figure 10-3