# Perwin Corporation estimates that an investment of $700,000 would be needed to produce and sell...

## Question:

Perwin Corporation estimates that an investment of $700,000 would be needed to produce and sell 48,000 units of Product B each year. At this level of activity, the unit product cost would be $30. Selling and administrative expenses would total $741,000 each year. The company uses the absorption costing approach to cost-plus pricing described in the text.

If a 15% rate of return on investment is desired, then the required markup for Product B would be closest to:

a. 15.00%

b. 51.46%

c. 58.75%

d. 48.54%

## Product Markup

Product markup means the additional amount one charge over the cost to his customer. So we can conclude that markup is the profit. To compute the markup we need to know the targets of the company. When the total desired profit is known then only we can conclude to the markup percentage per unit. Markup percentage can be as a percentage of cost or as a percentage of selling price.

## Answer and Explanation:

**Option C** 58.75% is the correct.answer.

**Explanation**

**Markup percentage on absorption cost** = ((Required Return on Investment * Investment) + Selling and administrative expenses) / (Unit product cost * Units sold)

Markup percentage on absorption cost = ((15% * $700000) + $741000] / ($30 * 48000) => ($846000 / $1440000) = 58.75%

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from Principles of Marketing: Help and Review

Chapter 12 / Lesson 22