Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y:
$\begin{array}{|l|r|}
\hline \text { Number of Units Sold Annually } & 20,000 \
\hline \text { Required Investment } & \$ 400,000 \
\hline \text { Unit Product Cost } & \$ 25 \
\hline \text { Selling, General, and Administrative } & \$ 130,000 \
\text { Expenses } & \
\hline
\end{array}$
If the company uses the absorption costing approach to cost-plus pricing and desires a 15% rate of return on investment (ROI),what would be the required markup on absorption cost for product Y?

Question

Marvel Company estimates that the following costs and activity would be associated with the manufacture and sale of one unit of product Y:
$\begin{array}{|l|r|}
\hline \text { Number of Units Sold Annually } & 20,000 \
\hline \text { Required Investment } & \$ 400,000 \
\hline \text { Unit Product Cost } & \$ 25 \
\hline \text { Selling, General, and Administrative } & \$ 130,000 \
 \text { Expenses } & \
\hline
\end{array}$
If the company uses the absorption costing approach to cost-plus pricing and desires a 15% rate of return on investment (ROI),what would be the required markup on absorption cost for product Y?

Quizplus · Accepted Answer

The required markup on absorption cost is calculated by considering the desired ROI on the investment and the total costs, including both the unit product cost and the fixed selling, general, and administrative expenses. The total cost per unit under absorption costing includes the unit product cost plus a portion of the fixed costs allocated per unit.1. Calculate the total fixed costs: $130,000 (Selling, General, and Administrative Expenses).2. Calculate the total unit product cost: $25.3. Calculate the total cost per unit: $25 (since fixed costs are not allocated per unit in the question, but they are considered in the overall pricing strategy).4. Calculate the desired return: 15% of $400,000 investment = $60,000.5. Calculate the total desired revenue: Total costs + Desired return = ($25 * 20,000 units) + $130,000 + $60,000 = $500,000 + $130,000 + $60,000 = $690,000.6. Calculate the required markup on total costs to achieve the desired revenue: (Desired revenue - Total costs) / Total costs. However, the information provided does not directly lead to a straightforward calculation using this formula, and the question seems to be focused on the markup on a per-unit basis considering the ROI.Given the desired ROI and the costs provided, the markup must cover both the fixed costs and provide the desired return on investment. The correct approach involves calculating the per-unit cost (including a share of the fixed costs), then adding the desired ROI.However, without directly allocating the fixed costs per unit in the calculation provided in the question, we aim to find the markup percentage that would allow for a 15% ROI on the $400,000 investment, which translates to $60,000 annually.The direct calculation of the markup percentage based on the provided data is not straightforward because the question does not specify how the fixed costs are allocated per unit under the absorption costing method. Typically, the markup would be calculated to ensure that the total revenue covers all costs (variable and fixed) and provides the desired ROI.Given the ambiguity in the calculation steps due to the lack of specific allocation of fixed costs per unit in the question, the correct answer involves understanding that the markup must ensure coverage of all costs plus the desired ROI. The answer D (38%) is selected based on the understanding that a higher markup percentage is necessary to cover both the fixed costs and achieve the desired ROI, but the exact calculation method is not clearly outlined in the question as it stands.

Marvel Company Estimates That the Following Costs and Activity Would