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  3. Hi John,

    For Q5 I did the following calculations:

    Sales revenue $600 Ɨ 5000 = $3,000,000
    Profit required 20/120 Ɨ $3,000,000 = $500,000
    Total cost $3,000,000 – $500,000 = $2,500,000
    Target cost p/unit $2,500,000 / 5000 = $500
    Cost gap $520 – $500 = $20

    I got the same answer, would my calculations be OK for the exam?

    Thanks,

    Tahsina

    • 250 is certainly not a rate of return (rates of returns are %’ages!).

      They require a return on investment of 20% and therefore they want a profit of 20% x $1,250,000.

      What you are doing would be correct if they wanted a profit on cost (i.e. a profit margin) of 20%.

      It would seem you did not watch my free lectures before attempting the test because this example is similar to example 2 in my lecture.

  12. It took my brain a while to figure out that reverse mathematical operation! I was only convinced when I realized that 20% of 500 (the unknown cost price) is 100 and when added gives us that 600 sale price. Defeated by math…
    Posted for anyone else coming here to figure it out.

    • The selling price is $600.

      For the profit to be 20% of the cost, the cost needs to be 100/120 x $600 = $500, and this is therefore the target cost.

      The estimated cost is actually $520, and therefore the cost gap is 520 – 500 = $20.

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