Overhead Error Impact on Markup

Steps:

• Correct overhead per unit: 4 hours × $8/hour =$32.
• Erroneous overhead per unit: 4 hours × $13/hour =$52.
• Overstatement in unit cost: $52 -$32 = $20.
• Selling price markup is 20% on total cost, so overstatement in selling price: $20 × 1.20 =$24.

Why D is correct:

• Markup applies to full cost (including overhead), so cost error of $20 inflates selling price by$20 plus 20% markup on that error ($4), totaling$24 per formula: SP = Cost × 1.20.

Why the others are wrong:

• A. $5: Ignores labor hours and markup entirely.
• B. $12: Applies 20% markup only to correct overhead, not the error.
• C. $20: Captures cost overstatement but omits markup on the error.

Final answer: D