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Crane Company- Markup Percentage

Crane Company has gathered the following information concerning one model of shoe:
Variable manufacturing costs
$51000
Variable selling and administrative costs
$49000
Fixed manufacturing costs
$160000
Fixed selling and administrative costs
$120000
Investment
$1900000
ROI
30%
Planned production and sales
5000 pairs
What is the markup percentage?

a) 150%
b) 570%
c) 204%
d) 270%

Answer

a) 150%

Explanation

Crane Company

Total Cost = $51,000 + $49,000 + $160,000 + $120,000 = $380,0000

ROI = $1,900,000 x 30% = $570,000

Markup = $570,000/$380,000 x 100 = 150%

Variable Manufacturing Costs: These are costs that directly increase with the production of each pair of shoes. In this case, the variable manufacturing cost is $51,000.

Variable Selling and Administrative Costs: These are costs associated with selling and administrative activities that vary with the number of pairs sold. The variable selling and administrative costs amount to $49,000.

Fixed Manufacturing Costs: Fixed costs remain constant regardless of the number of units produced. The fixed manufacturing cost for this model is $160,000.

Fixed Selling and Administrative Costs: Similar to fixed manufacturing costs, these are costs that do not change with the number of units sold. The fixed selling and administrative costs are $120,000.

Investment: This refers to the initial investment made by the Crane Company to develop and produce this model of shoes. The investment amount is $1,900,000.

ROI (Return on Investment): ROI is a measure of profitability, calculated by taking the net profit (which includes the ROI itself) and dividing it by the initial investment. In this case, the desired ROI is 30%, and therefore, the calculated ROI amount is $570,000 ($1,900,000 * 0.30).

Therefore, the markup percentage for this model of shoes is 150%.

This means that the selling price is set to cover all costs (variable and fixed), as well as the desired ROI of 30% on the investment. The calculated markup percentage of 150% indicates that the selling price is 1.5 times the total cost, ensuring a 50% increase over the costs incurred.

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