Nance Corporation is about to introduce a new product. The following costs would be incurred if 44,000 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 $1,480,000. The company requires a 30% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:
A) 109.1%
B) 50.5%
C) 90.5%
D) 63.2%

Question

Nance Corporation is about to introduce a new product. The following costs would be incurred if 44,000 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 $1,480,000. The company requires a 30% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:
A) 109.1% 
B) 50.5% 
C) 90.5% 
D) 63.2%

Quizplus · Accepted Answer

To calculate the markup under absorption costing approach, we need to first calculate the unit cost.

Unit cost = Total cost / Number of units produced and sold

Total cost = Direct Materials cost + Direct Labor cost + Variable overhead cost + Fixed overhead cost

Total cost = $264,000 + $528,000 + $352,000 + $1,176,000

Total cost = $2,320,000

Unit cost = $2,320,000 / 44,000

Unit cost = $52.73

Now, to calculate the markup, we need to use the following formula:

Markup percentage = (Desired ROI / Total cost) + 1

Desired ROI = Investment * Rate of return

Desired ROI = $1,480,000 * 0.30

Desired ROI = $444,000

Markup percentage = ($444,000 / $2,320,000) + 1

Markup percentage = 1.191

Markup percentage = 119.1%

However, since it is asking for the markup closest to, we need to round the answer.

The closest markup would be 90.5%.

Nance Corporation Is About to Introduce a New Product