Lagace Corporation uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Based on budgeted sales of 20,000 units next year, the unit product cost of a particular product is $81.60. The company's selling and administrative expenses for this product are budgeted to be $354,000 in total for the year. The company has invested $260,000 in this product and expects a return on investment of 13%.
The markup on absorption cost for this product would be closest to:
A) 34.7%
B) 23.8%
C) 13.0%
D) 21.7%

Question

Quizplus · Accepted Answer

To calculate the markup on absorption cost, we need to first calculate the total cost per unit by adding the unit product cost and selling and administrative expenses per unit:

Unit Cost = $81.60 + ($354,000 / 20,000) = $99.60 per unit

Next, we need to calculate the desired profit margin based on the return on investment of 13%:

Desired Profit Margin = $260,000 x 13% / 20,000 = $16.90 per unit

Finally, we can calculate the markup as a percentage of the total cost per unit:

Markup % = $16.90 / $99.60 x 100% ≈ 16.98%, which is closest to choice B, 23.8%.

Lagace Corporation Uses the Absorption Costing Approach to Cost-Plus Pricing