Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price of $1,000 for the same product. Patterson uses absorption manufacturing cost as the basis for computing its dollar markup whereas Clay uses total cost. Which of the following choices correctly denotes the company that would have (1) the higher cost basis for deriving its dollar markup and (2) the higher markup percentage respectively?
A)Patterson, Patterson.
B)Patterson, Clay.
C)Clay, Patterson.
D)Clay, Clay.
E)The companies would have the same cost basis and markup percentage.

Question

Quizplus · Accepted Answer

Clay would have the higher cost basis because total cost includes both manufacturing and non-manufacturing costs, whereas absorption cost includes only manufacturing costs. Patterson would have the higher markup percentage because it needs to cover non-manufacturing costs and profit with a smaller cost base.

Patterson and Clay Companies Both Use Cost-Plus Pricing Formulas and Arrived