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Hi there,
I am doing some practice questions on target costing and most of them are fine, but I am completely lost on one question (I have a Kaplan exam kit book, it is page 7, question 17 but just incase you can’t access this, the question is as follows):
“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 cost for the product is estimated to be $16 before allowing for additional materials to allow for shrinkage of 20% (for every 10kg of material going in, only 8kg comes out). Labour is the only other cost and 2 hours are needed.
What is the most the business can pay per labour hour, if the cost gap is to be avoided?”
The answer at the back makes no sense to me 🙁
My main issues are: how do I address the mark-up %? The answer at the back of the kit states that it’s “25/125 x 56”, but in the MCQ practice questions here, the calculation was “100/120 x 600” (when the mark-up was 20% and SP was $600? Is there a set way I can learn how to address mark-ups?
I also don’t understand how to tackle the material shrinkage part…?
Any advice would be greatly appreciated 🙂 thanks!!
I do not have the Kaplan Exam Kit.
However, with regard to mark-ups, if there is a mark-up of 25% then for every $100 cost, the profit is $25 and therefore the selling price is $125.
So for every $125 selling price the cost is $100. So the cost is always 100/125 times the selling price, and the profit is always 25/125 times the selling price.As far as the shrinkage is concerned, for every 10kg purchased only 8kg comes out. So for every 8kg used they need to buy 10kg. So they actually need to buy 10/8 times the material used in the product.
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