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The predicted selling price for a product has been set at $56 per unit. The desired mark-‘up
on cost is 25% and the material cost for the product is estimated to be $16 before allowing
for additional materials to allow for shrinkage of 20% (for every 10 kg of material going in,
only 8 kg comes out). Labour is the only other cost and 2 hours are needed.What is the most the business can pay per labour hour, if a cost gap is to be avoided?
Hope it’s not too late…
Material costs allowing for 20% waste= $16 X 100/80 = $20 (this is the actual material cost the company will pay for)
Total cost of the product consists of material cost and labor cost, so you have to add these two up first before adding the required mark up margin.
It says the cost gap is to be avoided, which means the target cost would be equal to the estimated actual cost.
It may look complex but you can simplify it with a simple math equation:
Say r is the labor rate per hour:
[$20 + 2 (r)] X 1.25 = $56
R = $12.40Hope it is correct!
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