Mercer Company Estimates That an Investment of $800,000 Would Be

Essay

Mercer Company estimates that an investment of $800,000 would be necessary in order to produce and sell 40,000 units of Product A each year. Costs associated with the new product would be: $\begin{array}{lll}\text { Variable costs (per unit): }&\\\text { Production } & \$ 30 \\\text { Selling and admintrative } & \$ 5\\\text { Fixed costs (per year): }&\\\text { Production } & \$ 300,000 \\\text { Selling and administrative } & \$ 240,000\end{array}$
The company requires a 20% rate of return on the investment on all products.
Required:
a. Compute the markup that would be used under the absorption costing approach to cost-plus pricing as described in the text.
b. Compute the selling price under the absorption costing approach to cost-plus pricing as described in the text.