Question

Dieckman Company makes a product with the following costs:

	Per Unit	Per Year
Direct materials	$17.90
Direct labor	$11.20
Variable manufacturing overhead	$3.70
Fixed manufacturing overhead		$716,900
Variable selling and administrative expenses	$1.00
Fixed selling and administrative expenses		$770,000

The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 67,000 units per year.

The company has invested $370,000 in this product and expects a return on investment of 17%.

Direct labor is a variable cost in this company.

The markup on absorption cost is closest to: (Round your intermediate calculations to 2 decimal places and final answers to 1 decimal place.)

77.6%

28.7%

17.0%

30.9%

Answer 1

Ans: 30.9%

Working:

Markup on absorption cost = [(Required ROI x Investment) + Selling and administrative expenses] / [ Unit product cost x unit sales]

Unit product cost computation:

	Per Unit
Direct materials	$17.90
Direct labor	$11.20
Variable manufacturing overhead	$3.70
Fixed manufacturing overhead $716,900/67,000	$10.70
Total	$ 43.5

Selling and administrative expenses computation:

Variable selling and administrative expenses	$1.00 *67,000	$67,000
Fixed selling and administrative expenses		$770,000
Total		$837,000

Markup on absorption cost is closest to:

=[($370,000 x 17%) + $837,000] / [ $43.50 x 67,000]

=$ 899,900 / $ 29,14,500

= 30.9%