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Hello,
first of all I would like to say thank you for your help.
Please. can you help me with the following question from my Exam Kit.The predicted selling price for a product – 56$
Desired mark-up – 25%
Material cost for product is estimated to be 16$ before allowing for additional materials to allow for shrinkage of 20% (for every 10 kg material going in, only 8 kg comes out)Labour is the only other cost and 2 hours are needed.
Question: What is the most the business can pay labour hour, if a cost gap is to be avoided.I was racking my brain trying to understand the meaning of before allowing for additional materials to allow for shrinkage of 20% (for every 10 kg material going in, only 8 kg comes out)
The answer is $12.40
The target cost is 100/125 x $56 = $44.80.
For every 8 kg of material they need to pay for 10kg, so the cost of materials needed will be 10/8 x $16 = $20So the maximum for about = 44.80 – 20 = 24.80. This is for 2 hours, and therefore $12.40 per hour.
Can I ask the second. the last one for this topic, just if you don’t mind, the similar problem.
Target cost – $38 p/u which is 5% less than the actual cost. Company is trying to reduce cost gap (improve labour effeciency) by providing trainings. Material cost – $10 p.u. and it will not change , labour rate is $8 per hour.
Question: How much of an efficiency improvement (in % of reduction in labour time per unit will be necessary to remove the cost gap completely). Accurate to 2 decimals
Answer: 6.67%
Workings:
Here they calculated labour cost as 3.75 hrs* 8/hr
Required labour cost – 3.5 hrs * 8/hr
but how did they come to this 3.75 and 3. 5 figures?The actual cost = 38/0.95 = 40.
Material is 10, so labour is 30.
Labour is paid 8 per hour, so it must be 30/8 = 3.75 hoursRequired cost is 38.
Material is 10 so labour is 28.
At 8 per hours, this is 28/8 = 3.5 hours@johnmoffat said:
The actual cost = 38/0.95 = 40.
Material is 10, so labour is 30.
Labour is paid 8 per hour, so it must be 30/8 = 3.75 hoursRequired cost is 38.
Material is 10 so labour is 28.
At 8 per hours, this is 28/8 = 3.5 hoursAs it is mentioned in the question about the efficiency changes will have no effect on current material cost per unit, why did we not subtract the material cost per unit of $10 during the actual cost calculation?
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