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Dear Mike,
Reference Question 5 of Chapter 2 (in Notes), i could not understand the calculation. My answer is resulting as 24 however this answer was not in option. Correct answer is 20 and the calculation to drive that answer is also given. However, i could not understand that calculation. Can you help me understanding that please.
For your convenience to address my query, i am writing down the actual question here:
The selling price of a product has been set at $600 per unit, and that price the company expects to sell 5,000 units a month.
The required mark-up is 20% of cost, and the expected production cost is $520 per unit.What is the target cost gap?
Options:
$20
$40
$30
$25Mike is not our Paper PM tutor (and never has been!).
I assume that you are referring to the practice test rather than the notes.
If the required mark-up is 20% of the cost, then for every $100 cost they will add on $20 and the selling price will be $120.
Putting it the other way round, for every $120 of sales, the cost will have to be $100 if they are to achieve the required profit.
Here, the selling price is set at $600 and therefore they need the cost to be 100/120 x 600 = $500. This is the target cost.
They are expecting that the cost will in fact be $520 and there is therefore a cost gap of 520 – 500 = $20.
Thank John, i recently studied F4 from Mike and asked several questions from him. Forgot to change the name as now i moved ahead to F5.
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