Question

Dickson Corporation makes a product with the following costs: Per Unit Per Year Direct materials $ 18.20 Direct labor $ 22.30 Variable manufacturing overhead $ 2.90 Fixed manufacturing overhead $ 1,296,000 Variable selling and administrative expenses $ 1.10 Fixed selling and administrative expenses $ 1,104,000 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 60,000 units per year. The company has invested $320,000 in this product and expects a return on investment of 15%. Direct labor is a variable cost in this company. The markup on absorption cost is closest to: 31.2% 15.0% 30.0% 96.5%

Answer 1

Ans: 31.2%

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	$18.20
Direct labor	$22.30
Variable manufacturing overhead	$2.90
Fixed manufacturing overhead $1296000/60,000	$21.60
Total	$ 65

Selling and administrative expenses computation:

Variable selling and administrative expenses	$1.10 *60,000	$66,000
Fixed selling and administrative expenses		$1104,000
Total		$1170,000

Markup on absorption cost is closest to:

=[($320,000 x 15%) + $1170,000] / [ $65x 60,000]

=$ 1218000 / $ 3900,000

= 31.2%