Nance Corporation Is About to Introduce a New Product

question 6

Multiple Choice

Nance Corporation is about to introduce a new product. The following costs would be incurred if 40,000 units are produced and sold each year: Nance Corporation uses the absorption costing approach to cost-plus pricing as described in the text.Assume that the company has not yet determined a markup to use on the new product. The new product would require an investment of $1,200,000. The company requires a 25% rate of return on investment in all new products. The markup under the absorption costing approach would be closest to:

• A) 70.0%
• B) 50.0%
• C) 83.3%
• D) 63.3%

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Definitions:

Dividend

A portion of a company's earnings distributed to shareholders, usually in the form of cash or additional shares.

PE Ratio

Price-to-Earnings Ratio; a valuation measure for a company comparing its current share price to its per-share earnings.

Yield %

The income return on an investment, such as the interest or dividends received, expressed as a percentage of the investment's cost or value.

Default Risk Premium

The additional yield that investors require to invest in bonds that have a risk of default, compared to risk-free bonds.