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I have a question about target costing that i completed and i got it all right apart from it estimated that the production of materials would be $16 before allowing for add. materials to allow for shrinkage of 20% (for every 10kg of material going in only 8kg comes out.).
The answer says I should do 16 x 10/8. When I completed it i did 16 x 20% so i was 40p out on my answer.
Would anyone be able to explain it to me so i understand why its 10/8?
Thanks
For every 10kg that are bought, 2 kg are wasted and only 8kg are available for production.
Or, putting it the other way round, for every 8kg used in production they will need to buy 10kg.
Therefore for 16 kg used in production the will need to buy 16 x 10/8 = 20 kg.
(and, of course, it checks. If they buy 20kg they will wast 4kg and have 16kg available for production)
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