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) 22.7%
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) 22.7% 
C) 15.8% 
D) 24.0%

Quizplus · Accepted Answer

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

Total cost per unit = Total production cost / Number of units produced
Total production cost = Direct materials + Direct labor + Manufacturing overhead
Direct materials = $45,000
Direct labor = $80,000
Manufacturing overhead = $325,000
Total production cost = $45000 + $80,000 + $325,000 = $450,000
Total cost per unit = $450,000 / 60,000 = $7.50

Next, we need to determine the desired profit Magpie Corporation wishes to earn, which is a 25% rate of return on invested assets of $700,000.

Desired profit = 25% x $700,000 = $175,000

Finally, we can calculate the markup percentage on total cost using the following formula:

Markup percentage on total cost = (Desired profit / Total cost) x 100%
Markup percentage on total cost = ($175,000 / ($450,000 + $175,000)) x 100%
Markup percentage on total cost = 22.7%

Therefore, the answer is B) 22.7%.

Magpie Corporation Uses the Total Cost Concept of Product Pricing