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If you believe in the statement, “The company’s
desired return on investment will be attained regardless of how many units are
actually sold when the formula for the markup percentage on absorption cost is
used when setting prices,” you will in incorrect position.
Recall that the formula for the
markup percentage on absorption cost is as follows:
(Required
ROI x Investment) + Selling, General & Admin expenses
Unit
sales x Unit product cost
Because unit sales are a component
of this formula, the required ROI will be attained only if the forecasted unit
sales volume is attained.
