Perwin Corporation estimates that an investment of $800,000 would be needed to produce and sell 50,000 units of Product B each year. At this level of activity, the unit product cost would be $50. Selling and administrative expenses would total $400,000 each year. The company uses the absorption costing approach to cost-plus pricing described in the text. If a 20% rate of return on investment is desired, then the required markup for Product B would be closest to:
A) 20%
B) 22%
C) 24%
D) 26%

Question

Quizplus · Accepted Answer

To calculate the required markup for Product B, we need to use the following formula:

Markup percentage = (Required rate of return / Total production cost per unit) x 100

Total production cost per unit includes both variable and fixed costs, and is calculated as follows:

Total production cost per unit = (Total production cost + Selling and administrative expenses) / Number of units produced

Using the information given in the question, we can calculate the total production cost per unit as follows:

Total production cost per unit = ($800,000 + $400,000) / 50,000 = $24

Now, we can plug in the numbers to calculate the required markup for 20% rate of return:

Markup percentage = (20% / $24) x 100 = 83.33%

Therefore, the closest answer choice is B, 22%.

Perwin Corporation Estimates That an Investment of $800,000 Would Be