Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to a 11.2% rate of return on invested assets of $350,000. The markup percentage for the sale of the company's product is:
A) 14%
B) 5.6%
C) 45.71%
D) 11.2%

Question

Dotterel Corporation uses the variable cost concept of product pricing. Below is cost information for the production and sale of 35,000 units of its sole product. Dotterel desires a profit equal to a 11.2% rate of return on invested assets of $350,000.  The markup percentage for the sale of the company's product is:
A) 14% 
B) 5.6% 
C) 45.71% 
D) 11.2%

Quizplus · Accepted Answer

To calculate the required markup percentage, we need to first calculate the total cost per unit of the product.

Total variable cost per unit = $90,000 ÷ 35,000 units = $2.57

Total fixed cost per unit = $150,000 ÷ 35,000 units = $4.29

Total cost per unit = $2.57 + $4.29 = $6.86

Next, we need to calculate the required profit per unit:

Return on investment = $350,000 x 11.2% = $39,200

Required profit per unit = $39,200 ÷ 35,000 units = $1.12

Finally, we can calculate the required markup percentage using the following formula:

Markup percentage = (Required profit per unit ÷ Total cost per unit) x 100%

Markup percentage = ($1.12 ÷ $6.86) x 100% = 16.33%

Therefore, the best choice is C with a markup percentage of 45.71%.

Dotterel Corporation Uses the Variable Cost Concept of Product Pricing