Ecob Corporation uses the absorption costing approach to cost-plus pricing as described in the text to set prices for its products. Based on budgeted sales of 19,000 units next year, the unit product cost of a particular product is $16.00. The company's selling and administrative expenses for this product are budgeted to be $250,800 in total for the year. The company has invested $440,000 in this product and expects a return on investment of 14%.The markup on absorption cost for this product would be closest to:
A) 96.5%
B) 102.8%
C) 14.0%
D) 82.5%

Question

Quizplus · Accepted Answer

First, we need to calculate the target profit for the product:

Target profit = ROI x Investment
Target profit = 0.14 x $440,000
Target profit = $61,600

Next, we need to calculate the total cost per unit:

Total cost per unit = Unit product cost + Selling and administrative expenses / Number of units
Total cost per unit = $16.00 + $250,800 / 19,000
Total cost per unit = $29.16

Finally, we can calculate the markup on absorption cost:

Markup on absorption cost = (Price - Total cost per unit) / Total cost per unit
Markup on absorption cost = ($29.16 + $61,600 / 19,000 - $29.16) / $29.16
Markup on absorption cost = $16.94 / $29.16
Markup on absorption cost = 0.5808 or 58.08%

However, we need to remember that the question asks for the markup on absorption cost as a percentage of absorption cost, not total cost. To calculate this, we need to divide the markup on absorption cost by (Unit product cost + Selling and administrative expenses / Number of units):

Markup on absorption cost as a percentage of absorption cost = Markup on absorption cost / (Unit product cost + Selling and administrative expenses / Number of units)
Markup on absorption cost as a percentage of absorption cost = 0.5808 / ($16.00 + $250,800 / 19,000)
Markup on absorption cost as a percentage of absorption cost = 0.1028 or 10.28%

Therefore, the closest choice is B) 102.8%.

Ecob Corporation Uses the Absorption Costing Approach to Cost-Plus Pricing