Question

Hordel Company needs to determine a markup for a new product. Hordel expects to sell 5,000 units and wants a target profit of $82 per unit. Additional information is as follows:

Variable product cost per unit	$	79
Variable administrative cost per unit		21
Total fixed overhead		42,000
Total fixed administrative		31,000

Using the variable cost method, what markup percentage to variable cost should be used?

Multiple Choice

• 94.1%

• 80.1%

• 96.6%

• 98.20%

• 91.7%

Answer 1

Solution:

Required markup to cover fixed cost and profit = Fixed cost + Target profit

= ($42,000 + $31,000) + (5000*$82) = $483,000

Total variable cost = ($79 + $21) * 5000 = $500,000

Required markup percentage on variable cost = $483,000 / $500,000 = 96.6%

Hence 3rd option is correct.