Question

Joeston Corporation makes a product with the following costs:

	Per Unit				Per Year
Direct materials	$	18.10
Direct labor	$	15.80
Variable manufacturing overhead	$	5.40
Fixed manufacturing overhead					$	473,200
Variable selling and administrative expenses	$	4.70
Fixed selling and administrative expenses					$	301,600

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 26,000 units per year. The company has invested $616,000 in this product and expects a return on investment of 15%. The markup on absorption cost would be closest to:

Answer 1

Particulars	Unit Cost	Amount (in $)
Direct materials    (26,000 units x $18.10)	$18.10	$470,600
Direct labor       (26,000 units x $15.80)	$15.80	$410,800
Variable manufacturing overhead     (26,000 units x $5.40)	$5.40	$140,400
Fixed manufacturing overhead              ($ 473,200 / 26,000 )	$18.20	$473,200
Total	$57.5	$1,495,000

Variable selling and administrative expenses ( 26,000 units x $4.70)		$122,200
Fixed selling and administrative expenses		$301,600
Total selling and administrative expenses		$423,800
Return on investment (ROI) ($616,000 x 15%)		$92,400
Mark up on absorption Cost (ROI + Total selling and administrative expenses) / Cost of Sales	($92,400 + $423,800) / $1,495,000	34.53%
Mark up on absorption Cost	34.53%