Joeston Corporation makes a product with the following costs: $\begin{array}{lrr}
&\text { Per Unit } & \text { Per Year } \
\text {Direct materials }&\$ 14.70 & \
\text {Direct labor }&\$ 14.10 & \
\text {Variable manufacturing overhead }&\$ 3.70 \\text { Fixed manufacturing overhead. }&&\$305,200\\text { Variable selling and administrative expenses }&\$3.00\\text { Fixed selling and administrative expenses }&&\$163,800
\end{array}$ 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 14,000 units per year. The company has invested $540,000 in this product and expects a return on investment of 10%. The markup on absorption cost would be closest to:
A)27.1%
B)124.2%
C)34.2%
D)10.0%

Question

Quizplus · Accepted Answer

The markup percentage is calculated by dividing the desired return on investment by the total absorption cost per unit. The absorption cost per unit includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead per unit. The desired return is $54,000 (10% of $540,000). The absorption cost per unit is $14.70 + $14.10 + $3.70 + ($305,200 / 14,000) = $49.50. The markup percentage is $54,000 / ($49.50 * 14,000) = 34.2%.

Joeston Corporation Makes a Product with the Following Costs The Company Uses the Absorption Costing Approach to Cost-Plus Pricing