Assume that a company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information:

Number of units to be produced and sold each year	15,000
Unit product cost	$ 30
Estimated annual selling and administrative expenses	$ 50,400
Estimated investment required by the company	$ 780,000
Desired return on investment (ROI)	12%
What is the markup percentage on absorption cost required to achieve the desired ROI?

Multiple Choice

32%


27%


37%


42%

To determine the markup percentage on absorption cost required to achieve the desired return on investment (ROI), we can break the calculation into several steps:

### Step 1: Calculate Desired Profit
The desired profit is based on the desired return on investment (ROI). 

Desired Profit = Investment × Desired ROI

Given that:
- Estimated investment required by the company = $780,000
- Desired ROI = 12%

\[
\text{Desired Profit} = 780,000 \times 12\% = 780,000 \times 0.12 = 93,600
\]

### Step 2: Calculate Total Cost
The total cost consists of both the total product costs and the total selling and administrative expenses.

1. **Product Cost**: The unit product cost is given as $30, and the number of units to be produced and sold each year is 15,000 units. Thus, the total product cost is:

\[
\text{Total Product Cost} = 30 \times 15,000 = 450,000
\]

2. **Selling and Administrative Expenses**: These are given as $50,400 annually.

\[
\text{Total Cost} = 450,000 + 50,400 = 500,400
\]

### Step 3: Calculate the Required Revenue
The revenue required to achieve the desired profit is the sum of the total cost and the desired profit:

\[
\text{Required Revenue} = \text{Total Cost} + \text{Desired Profit} = 500,400 + 93,600 = 594,000
\]

### Step 4: Calculate the Selling Price Per Unit
To find the required selling price per unit, divide the required revenue by the number of units to be sold:

\[
\text{Selling Price Per Unit} = \frac{594,000}{15,000} = 39.60
\]

### Step 5: Calculate the Markup Percentage
The markup percentage is based on the difference between the selling price per unit and the cost per unit, relative to the cost per unit:

\[
\text{Markup Percentage} = \left( \frac{39.60 - 30}{30} \right) \times 100 = \left( \frac{9.60}{30} \right) \times 100 = 32\%
\]

### Conclusion:
The markup percentage required to achieve the desired ROI is **32%**.

The correct answer is:

**32%**

---

Do you have any questions or need further details? Here are some related questions:

1. How does absorption costing differ from variable costing?
2. What are the pros and cons of using a cost-plus pricing strategy?
3. How would the markup percentage change if the investment or ROI changed?
4. What role do selling and administrative expenses play in determining pricing?
5. How can the company ensure that it consistently achieves the desired ROI?

**Tip:** Understanding how ROI impacts pricing can help businesses align their financial goals with their market strategies.

Assume that a company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information:

Number of units to be produced and sold each year: 15,000
Unit product cost: $30
Estimated annual selling and administrative expenses: $50,400
Estimated investment required by the company: $780,000
Desired return on investment (ROI): 12%
What is the markup percentage on absorption cost required to achieve the desired ROI?

Multiple Choice: 32%, 27%, 37%, 42%

Calculate the markup percentage required to achieve a 12% ROI using absorption costing in cost-plus pricing. Learn how to determine selling price per unit based on product cost, selling expenses, and desired profit, with detailed steps for undergraduate business students.

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