Dickson Corporation makes a product with the following costs: The company uses the absorption costing approach to cost-plus pricing described in the text.The pricing calculations are based on budgeted production and sales of 60, 000 units per year. The company has invested $320, 000 in this product and expects a return on investment of 15%.
Direct labor is a variable cost in this company.
The markup on absorption cost is closest to:
A)96.5%
B)15.0%
C)31.2%
D)30.0%

Question

Dickson Corporation makes a product with the following costs:  The company uses the absorption costing approach to cost-plus pricing described in the text.The pricing calculations are based on budgeted production and sales of 60, 000 units per year. The company has invested $320, 000 in this product and expects a return on investment of 15%.
Direct labor is a variable cost in this company.
The markup on absorption cost is closest to:
A)96.5% 
B)15.0% 
C)31.2% 
D)30.0%

Quizplus · Accepted Answer

To calculate the markup on absorption cost, we need to first calculate the absorption cost per unit. The absorption cost per unit includes both variable and fixed costs.

Absorption cost per unit = (Total production cost ÷ Number of units produced)
= ($1,160,000 ÷ 60,000) = $19.33 per unit

We then calculate the desired profit per unit by multiplying the absorption cost per unit by the desired return on investment:

Desired profit per unit = (Absorption cost per unit × Desired ROI)
= ($19.33 × 15%) = $2.90 per unit

Finally, we add the desired profit per unit to the absorption cost per unit to get the markup on absorption cost:

Markup on absorption cost = [(Absorption cost per unit + Desired profit per unit) ÷ Absorption cost per unit] × 100%
= [($19.33 + $2.90) ÷ $19.33] × 100% = 131.2%

Therefore, the closest option is C) 31.2%.

Dickson Corporation Makes a Product with the Following Costs