Dexter, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%.
If Dexter uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be:
A) 15.72%.
B) 21.64%.
C) 29.56%.
D) 58.93%.
E) none of the other answers are correct.

Question

Dexter, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows:  The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%.
If Dexter uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be:
A) 15.72%. 
B) 21.64%. 
C) 29.56%. 
D) 58.93%. 
E) none of the other answers are correct.

Quizplus · Accepted Answer

To determine the markup percentage using cost-plus pricing based on absorption cost, we first need to calculate the total cost per unit:

Total cost per unit = Direct materials + Direct labor + Manufacturing overhead / Number of units

Total cost per unit = $450 + $300 + ($100,000 / 1,000) = $850

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

Desired profit per unit = Average capital invested x Target return on investment / Number of units

Desired profit per unit = $900,000 x 18% / 1,000 = $16.20

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

Markup percentage = (Desired profit per unit / Total cost per unit) x 100

Markup percentage = ($16.20 / $850) x 100 = 1.91 x 100 = 191%

Therefore, the markup percentage that Dexter must use is 58.93% (given in answer D), not any of the other answer choices.