Minden Corporation estimates that the following costs and activity would be associated with the manufacture and sale of product A: If the company uses the absorption costing approach to cost-plus pricing described in the text and desires a 25% rate of return on investment (ROI),the required markup on absorption cost for Product A would be closest to:
$\begin{array}{lr}
\text { Number of units sold annually ............................ } & 80,000 \
\text { Required investment............................... } & \$ 400,000 \
\text { Unit product cost........................... } & \$ 30 \
\text { Selling and administrative expenses................... } & \$ 300,000
\end{array}$

Question

Quizplus · Accepted Answer

To find the required markup on absorption cost, first calculate the desired profit: $0.25 \times \$400,000 = \$100,000$. Total cost = (80,000 units $\times$ \$30) + \$300,000 = \$2,700,000. Required markup = $\frac{\$100,000}{\$2,700,000}$ = 0.037 or 3.7%. The markup on the unit cost is $\frac{\$100,000}{80,000 \times \$30}$ = 0.0417 or 4.17%. The closest choice is 17%.

Minden Corporation Estimates That the Following Costs and Activity Would