Question

Firefly Corporation produces outdoor portable fireplace units. The following cost information per unit is available: direct materials $19, direct labour $13, variable manufacturing overhead $17, fixed manufacturing overhead $26, variable selling and administrative expenses $11, and fixed selling and administrative expenses $16. The company’s ROI per unit is $15.

1)Calculate Firefly Corporation’s markup percentage using absorption-cost pricing. (Round answer to 2 decimal places, e.g. 15.25%.)

2)Calculate Firefly Corporation’s markup percentage using variable-cost pricing. (Round answer to 2 decimal places, e.g. 15.25%.)

Answer 1

Selling and administrative overheads are not included in cost of goods sold

The major difference between absorption and variable costing is that absorption costing uses fixed and variable manufacturing overheads while variable costing uses only variable manufacturing overheads.

Absorption method

Cost of goods sold = material + labour + variable manufacturing overhead + fixed manufacturing overhead

Cost of goods sold = 19 + 13 + 17 + 26 = $75

ROI = $15

markup = ROI / cost

Markup = 15/75

Markup = 20%

variable method

Cost of goods sold = material + labour + variable manufacturing overhead

Cost of goods sold = 19 + 13 + 17 = $59

ROI = $15

markup = ROI / cost

Markup = 15/59

Markup = 25.42%

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