Final answer:
Adding a markup to variable costs helps set a product's sale price to cover all costs including labor, raw materials, and fixed costs, ensuring a profit for the company.
Step-by-step explanation:
By simply adding a markup to variable costs, a company determines the sale price of its products by covering variable costs and adding a percentage for profit. Variable costs are those expenses that vary directly with changes in production output, such as labor and raw materials. When fixed costs of $160 are present without production, as production starts, these variable costs are added to the fixed costs. Consequently, the total cost will be the sum of variable costs, fixed costs, and the markup. When a markup is added to variable costs, it helps ensure that all costs are covered and a profit is made above the total cost.