Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 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 $1,200,000. The company requires a 25% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:
A) 70.0%
B) 50.0%
C) 83.3%
D) 63.3%

Question

Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 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 $1,200,000. The company requires a 25% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:
A) 70.0% 
B) 50.0% 
C) 83.3% 
D) 63.3%

Quizplus · Accepted Answer

To calculate the markup using absorption costing approach, we need to first calculate the total cost per unit. The total cost per unit would include both variable and fixed costs.

Total cost per unit = (Variable cost per unit + Total fixed cost per year) / Number of units produced and sold per year
Variable cost per unit = Direct materials + Direct labor + Variable manufacturing overhead
Total fixed cost per year = Fixed manufacturing overhead + Fixed selling and administrative expenses

Variable cost per unit = $90 + $20 + $10 = $120
Total fixed cost per year = $800,000 + $400,000 = $1,200,000
Total cost per unit = ($120 + $1,200,000/40,000) = $150

Now, to calculate the markup, we need to add a percentage to the total cost per unit that would ensure a 25% rate of return on the investment. The formula for markup is:

Markup percentage = (Desired rate of return x Investment) / Total cost

Markup percentage = (25% x $1,200,000) / $150 = 83.3%

Therefore, the markup under the absorption costing approach would be closest to 83.3%.

Nance Corporation Is About to Introduce a New Product