Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be: The company requires a 20% return on the investment in all products. The company used the absorption costing approach to cost-plus pricing as described in the text.
-The markup percentage needed on Product S in order to achieve the company's required return on investment would be:
A) 29%
B) 40%
C) 50%
D) 37%

Question

Raymond Company estimates that an investment of $800,000 would be necessary to produce and sell 40,000 units of Product S each year. Costs associated with the new product would be:  The company requires a 20% return on the investment in all products. The company used the absorption costing approach to cost-plus pricing as described in the text.
-The markup percentage needed on Product S in order to achieve the company's required return on investment would be:
A) 29% 
B) 40% 
C) 50% 
D) 37%

Quizplus · Accepted Answer

To calculate the markup percentage required, we need to first calculate the total cost per unit of Product S using absorption costing.

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

= ($600,000 + $200,000 + $180,000)/40,000

= $24

Now, we need to add a markup percentage to this cost that will provide a 20% return on the investment of $800,000.

20% return on investment = ($800,000 x 0.2) = $160,000

Target profit per unit = $160,000/40,000 = $4

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

= ($4/$24) x 100

= 16.67% x 100

= 40%

Therefore, the markup percentage needed on Product S in order to achieve the company's required return on investment is 40%.

Raymond Company Estimates That an Investment of $800,000 Would Be