The Sloan Corporation must invest $120,000 to produce and market 16,000 units of Product X each year. The company uses the absorption costing approach to cost-plus pricing described in the text to set prices for its products. Other cost information regarding Product X is as follows: $\begin{array}{lrr}
&\text { Per Unit } & \text { total } \
\text {Direct materials }&\$ 7 & \
\text {Direct labor }&\$ 5 & \
\text {Variable manufacturing overhead }&\$ 24 \\text { Fixed manufacturing overhead. }&&\$80,000\\text { Variable selling and administrative expenses }&\$3\\text { Fixed selling and administrative expenses }&&\$72,000
\end{array}$ If Sloan Corporation requires a 15% return on investment, then the markup percentage on absorption cost for Product X (rounded to the nearest percent) would be:

Question

Quizplus · Accepted Answer

The markup percentage on absorption cost for Product X is calculated as follows:Markup percentage = (Desired return on investment / Absorption cost) x 100%Absorption cost = Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead + Variable selling and administrative expenses + Fixed selling and administrative expensesAbsorption cost = $7 + $5 + $24 + $80,000 + $3 + $72,000 = $181,000Markup percentage = (15% / $181,000) x 100% = 41%

The Sloan Corporation Must Invest $120,000 to Produce and Market