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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA APM Exams › folt manufacturing march jun 19
please explain in question ii) why the target costing does not include the inspection costs of 100,000
They are included.
Total inspection costs for the remaining 2 years = 2 x 100,000 = 200,000
Remaining products to be made = 250,000
200/250 = 0.8.
This is included in the answer ( at least it is in the ACCA version of the answer).
Regarding requirement ii, in the answer the target cost is calculated by using 25% profit margin, not 20%. Why?
It is to do with the difference between the meaning of profit margin and mark-up.
Profit margin (or gross profit margin) is always with respect to sales. Mark-up is always with respect to costs.
If an item sells for $100 and there is a profit margin of 20%, then the profit is to be $20 and therefore the costs will be $100 – $20 = $80.
However, this means that the mark-up is 20/80 = 25%.
In the question, the selling price is $175; at a profit margin of 20%, the profit must be $35 and the costs must therefore be 175 – 35 = 140. The mark-up is 35/140 = 25%.