Werry Company is about to introduce a new product. It is expected that the following costs would be incurred when 25,000 units are produced and sold in a year: Werry Company uses the absorption costing approach to cost-plus pricing as described in the text.
-Assume that Werry Company has not yet determined a markup to use on the new product.The new product would require an investment of $800,000.The company requires a 20% rate of return on investment on all new products.The markup under the absorption costing approach would be closest to:
A)62.0%
B)80.0%
C)35.0%
D)24.6%

Question

Werry Company is about to introduce a new product. It is expected that the following costs would be incurred when 25,000 units are produced and sold in a year:  Werry Company uses the absorption costing approach to cost-plus pricing as described in the text.
-Assume that Werry Company has not yet determined a markup to use on the new product.The new product would require an investment of $800,000.The company requires a 20% rate of return on investment on all new products.The markup under the absorption costing approach would be closest to:
A)62.0% 
B)80.0% 
C)35.0% 
D)24.6%

Quizplus · Accepted Answer

Unit product cost = $14 per unit + $6 per unit = $20 per unit
Selling and administrative expenses = $4 per unit F1F1F1S1F1F1F10 25,000 units + $50,000 = $150,000
Markup percentage on absorption cost = [(Required ROI F1F1F1S1F1F1F10 Investment)+ Selling and administrative expenses] F1F1F1S1F1F1F10 (Unit product cost F1F1F1S1F1F1F10 Unit sales)
= [(20% F1F1F1S1F1F1F10 $800,000)+ $150,000] F1F1F1S1F1F1F10 ($20 per unit F1F1F1S1F1F1F10 25,000 units)
= [($160,000)+ $150,000] F1F1F1S1F1F1F10 ($500,000)
= [$310,000] F1F1F1S1F1F1F10 $500,000 = 62%

Werry Company Is About to Introduce a New Product