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The predicted selling price for a product has been set at $56 per unit. The desired mark-up on cost is 25% and the material costs is estimated to be $16 before allowing for additional materials to allow for shrinkage of 20%( for every 10kg material input only 8 kg comes out)
If labour is the only other cost and 2 hrs are needed, what is the most the business can pay per hour if the cost gap is to be avoided?
Answer: Sales 56
Profit 11.2
Target Cost 44.8
Materials (20)
Labor-2 hrs 24.8For 1 labor hr 12.4.
Sir could you explain how we get 20 for materials?
For every 10kg that they buy, only 8kg are available to use in the product (because of the shrinkage).
Putting it the other way round, for every 8kg that they use in the product, they need to buy 10kg.
Therefore if they use $16 in the product for 8kg (which is $2 per kg) they actually need to buy 10kg and will therefore spend 10/8 x $16 (or 10kg x $2) which is $20,
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