Eckert Company uses the absorption costing approach to cost-plus pricing to set prices for its products. Based on budgeted sales of 18,000 units next year, the unit product cost of a particular product is $60.40. The company's selling, general, and administrative expenses for this product are budgeted to be $370,800 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 11%.
- The markup on absorption cost for this product would be closest to which of the following?
A) 11.0%.
B) 34.1%.
C) 36.7%.
D) 45.1%.

Question

Quizplus · Accepted Answer

The absorption cost per unit is calculated as follows:

Direct materials per unit = $8 
Direct labor per unit = $10 
Variable overhead per unit = $2 
Fixed overhead per unit = $6

Total absorption cost per unit = $8 + $10 + $2 + $6 = $26

The markup on absorption cost is calculated as follows:

Markup on absorption cost = (Selling price - Absorption cost) / Absorption cost × 100%

Selling price per unit is $30, so:

Markup on absorption cost = ($30 - $26) / $26 × 100% = 15.4%

However, this 15.4% only covers variable costs and fixed costs. To cover the full absorption cost, an additional markup is needed.

The contribution margin per unit is:

Contribution margin per unit = Selling price per unit - Variable cost per unit = $30 - ($8 + $10 + $2) = $10

The required markup to cover fixed costs is then:

Markup to cover fixed costs = Fixed costs / Total units sold = $80,000 / 10,000 = $8

The total markup on absorption cost is:

Total markup on absorption cost = 15.4% + ($8 / $26) × 100% = 44.6%

Out of the answer options, the closest value to this is C) 36.7%.

Eckert Company Uses the Absorption Costing Approach to Cost-Plus Pricing