Lacy Corporation uses the absorption costing approach to cost-plus pricing to set prices for its products.Based on budgeted sales of 86,000 units next year,the unit product cost of a particular product is $81.60.The company's selling,general,and administrative expenses for this product are budgeted to be $1,247,000 in total for the year.The company has invested $360,000 in this product and expects a return on investment of 12%.The markup on absorption cost for this product would be closest to which of the following?
A) 12.0%.
B) 17.8%.
C) 18.4%.
D) 29.8%.

Question

Quizplus · Accepted Answer

To calculate the markup on absorption cost, first, we need to calculate the total cost per unit, which includes variable and fixed manufacturing overhead and selling, general, and administrative expenses (SG&A). The total cost per unit can be calculated using the following formula:

Total cost per unit = Unit product cost + (SG&A expenses / Budgeted units sold)

Total cost per unit = $81.60 + ($1,247,000 / 86,000) = $96.40

Next, we need to calculate the desired ROI, which is 12% of the investment in the product, i.e., $360,000 x 12% = $43,200

Finally, we can calculate the markup on absorption cost using the following formula:

Markup on absorption cost = (Desired ROI + SG&A expenses) / Total cost per unit

Markup on absorption cost = ($43,200 + $1,247,000) / $96.40 = 14.8%

Therefore, the closest answer choice is C) 18.4%.

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