Question

Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of product Y: Number of units sold annually 30,000 Required investment $500,000 Unit product cost $29 Selling and administrative expenses $222,100 If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 13% rate of return on investment (ROI), the required markup on absorption cost for product Y would be closest to:

Answer 1

33%

Step-by-step explanation:

Profit ÷ Required Investment = Desired rate of return on investment

Profit ÷ 500,000 = 0.13

Profit = $65,000

Gross Profit required:

= Profit + Selling and administrative expenses

= $65,000 + $222,100

= $287,100

Gross profit per unit required:

= Gross Profit required ÷ Number of units sold

= $287,100 ÷ 30,000

= $9.57

Thus, selling price:

= Gross profit per unit required + Unit product cost

= $9.57 + $29

= $38.57

Markup:

= selling price ÷ Unit product cost

= 38.57 ÷ 29

= 1.33

(Mark up of 33%)