Perwin Corporation estimates that an investment of $400,000 would be needed to produce and sell 30,000 units of Product B each year. At this level of activity, the unit product cost would be $25. Selling and administrative expenses would total $350,000 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:
A)15%
B)49%
C)55%
D)58%

Question

Quizplus · Accepted Answer

The required markup is calculated by determining the desired profit and dividing it by the total cost. Desired profit is 15% of the $400,000 investment, which is $60,000. Total cost is the sum of production cost ($25 * 30,000 = $750,000) and selling/administrative expenses ($350,000), totaling $1,100,000. The markup percentage is ($60,000 / $1,100,000) * 100% = 5.45%, which rounds to 55%.

Perwin Corporation Estimates That an Investment of $400,000 Would Be