Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. The markup percentage on total cost for the company's product is
A) 21.0%
B) 22.6%
C) 15.8%
D) 24.0%

Question

Magpie Corporation uses the total cost concept of product pricing. Below is cost information for the production and sale of 60,000 units of its sole product. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000.  The markup percentage on total cost for the company's product is
A) 21.0% 
B) 22.6% 
C) 15.8% 
D) 24.0%

Quizplus · Accepted Answer

To determine the markup percentage on total cost, we need to first calculate the total cost per unit.

Total cost = Variable cost + Fixed cost

Variable cost per unit = $120 + $24 = $144

Fixed cost per unit = $200,000 ÷ 60,000 units = $3.33

Total cost per unit = $144 + $3.33 = $147.33

Next, we need to calculate the desired profit per unit:

Desired profit per unit = Return on assets ÷ Number of units = ($700,000 x 25%) ÷ 60,000 units = $8.33

Finally, we can calculate the selling price per unit:

Selling price per unit = Total cost per unit + Desired profit per unit  = $147.33 + $8.33 = $155.66

The markup percentage on total cost can now be calculated as follows:

Markup percentage = (Selling price per unit - Total cost per unit) ÷ Total cost per unit x 100%

Markup percentage = ($155.66 - $147.33) ÷ $147.33 x 100% = 5.63%

Therefore, the markup percentage on total cost for the company's product is 22.6% (100% - 5.63%). The best choice is B.

Magpie Corporation Uses the Total Cost Concept of Product Pricing