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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)If the material cost is $16 before allowing for the shrinkage, then it means that for every 8kg needed then they will have to buy 10kg right.
so cot per kg would be 16/10 isnt it ? because 16 is cost before allowing for shrinkage. before shrinkage it was 10kg.But you can surely see for yourself that what you are doing cannot be correct!!!
16/10 = $1.60 per kg which could not possibly be the correct answer!!!!Buying 10 kg will mean that they spend 10 x $16 = $160.
Because of shrinkage they will only end up with 8kg (10 – (20%x10). So the cost of every 8kg for production is $160 and therefore the cost per kg is 160/8 = $20 per kg.(or, 10/8 x $16 = $20 per kg).
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