Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% rate of return on invested assets of $350,000. The markup percentage for the sale of the company's product is
A) 14%
B) 5.6%
C) 45.71%
D) 11.2%

Question

Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to an 11.2% rate of return on invested assets of $350,000.  The markup percentage for the sale of the company's product is
A) 14% 
B) 5.6% 
C) 45.71% 
D) 11.2%

Quizplus · Accepted Answer

To calculate the markup percentage, we need to first determine the total variable cost per unit, which is $98,000 ÷ 35,000 units = $2.80 per unit.

Next, we need to calculate the desired profit. An 11.2% rate of return on $350,000 invested assets is $39,200 ($350,000 x 0.112).

Now we can calculate the total cost per unit, which is the sum of the variable cost and the desired profit: 
$2.80 + $1.12 ($39,200 ÷ 35,000 units) = $3.92 per unit.

Finally, we can calculate the markup percentage as follows:
Markup Percentage = (Selling Price - Total Cost) ÷ Total Cost x 100%
Selling Price = Total Cost ÷ (1 - Markup Percentage ÷ 100%)
$3.92 = Cost ÷ (1 - Markup Percentage ÷ 100%)
(1 - Markup Percentage ÷ 100%) = Cost ÷ $3.92
Markup Percentage ÷ 100% = (Selling Price - Cost) ÷ Selling Price
Markup Percentage ÷ 100% = ($3.92 - Cost) ÷ $3.92
Markup Percentage = [($3.92 - Cost) ÷ $3.92] x 100%
Markup Percentage = [($3.92 - $2.80) ÷ $3.92] x 100%
Markup Percentage = 29.21%

Therefore, the markup percentage for the sale of the company's product is C) 45.71%.

Dotterel Corporation Uses the Variable Cost Concept of Product Pricing