Lacy Corporation uses the absorption costing approach to cost-plus pricing described in the text 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 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:
A)12.0%
B)18.4%
C)29.8%
D)17.8%

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost per unit by adding the unit product cost and selling/administrative expenses per unit:

Total cost per unit = $81.60 + ($1,247,000 / 86,000) = $96.00

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

ROI per unit = ($360,000 x 0.12) / 86,000 = $0.50

Finally, we can calculate the markup on absorption cost:

Markup = (Total cost per unit + ROI per unit) / Absorption cost per unit 
Markup = ($96.00 + $0.50) / $81.60 
Markup = 1.1935

Therefore, the markup on absorption cost for this product is closest to 18.4% (rounded to one decimal place).

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