Perwin Corporation estimates that an investment of $660,000 would be needed to produce and sell 44,000 units of Product B each year. At this level of activity, the unit product cost would be $30. Selling and administrative expenses would total $669,900 each year. The company uses the absorption costing approach to cost-plus pricing described in the text. If a 15% rate of return on investment is desired, then the required markup for Product B would be closest to: (Do not round intermediate calculations.)
A) 15.00%
B) 50.75%
C) 58.25%
D) 49.25%

Question

Quizplus · Accepted Answer

The total cost per unit of Product B can be calculated as follows:

Total cost per unit = (Total manufacturing cost + Selling and administrative expenses) / Number of units

Total manufacturing cost = $660,000
Number of units = 44,000
Unit product cost = $30
Selling and administrative expenses = $669,900

Total cost per unit = ($660,000 + $669,900) / 44,000 = $30.225

To achieve a 15% rate of return on investment, the required markup would be:

Markup % = (Desired ROI / Total cost per unit) x 100

Desired ROI = 15%
Total cost per unit = $30.225

Markup % = (15% / $30.225) x 100 = 49.25%

Therefore, the closest required markup for Product B would be 49.25%, which is answer choice D.

Perwin Corporation Estimates That an Investment of $660,000 Would Be