Question

Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price of $1,000 for the same product. Patterson uses absorption manufacturing cost as the basis for computing its dollar markup whereas Clay uses total cost. Which of the following choices correctly denotes the company that would have (1) the higher cost basis for deriving its dollar markup and (2) the higher markup percentage?
Cost Basis Patterson Patterson Clay Clay More information is needed to judge Markup Percentage Patterson Clay Patterson Clay More information is needed to judge
A. Choice A
B. Choice B
C. Choice C
D. Choice D
E. Choice E

Answer 1

Answer:

Patterson and Clay Companies

1. Higher cost basis for marking up is:

= Clay Company

2. Higher markup percentage is:

= Patterson Company

Explanation:

a) Data and Analysis:

Costing formulas:

Patterson:

Absorption manufacturing cost

Markup = Higher markup rate

Selling price $1,000

Clay:

Total cost = Higher cost basis for marking up

Markup

Selling price $1,000

b) Total cost is higher than total manufacturing costs.  It includes more than the total manufacturing costs.  Absorption manufacturing costs only include the variable manufacturing costs and fixed manufacturing overhead costs.  Total costs include all the absorption costs and other selling, administrative, and distribution costs.