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Hello tutor I’m in Kampala (Uganda) and preparing to sit for F5 this Dec. However I came across this target cost number that has been driving me crazy I really need some explanation. Question is follows;
Target selling price $20 per unit
Target mark-up on cost 1/3
Estimated production cost $16 per unitFind the cost gap
I do acknowledge that the answer is $1 but my main concern is how they got the $15
where by $16-$15=$1
Please elaborate
Thanks a lot!!
I am not sure If I am allowed here to help you, but this is my solution to your query.
Your products selling price is $20 from which we have to subtract the mark-up to get the target cost.
Selling Price $20 – $6.666(w) = $13.334
Working: $20 / 100 x 33.33(1/3) = $6.666
Your target cost should be $13.334 whereas your production cost is $16 – Cost Gap is 2.666 ($16 – $13.334).
Deelo is wrong unfortunately. (please do not answer in this forum – it is Ask the ACCA tutor – but please do answer in the normal F5 forum which is for students to help each other 🙂 )
Maybe I can put it in another way:
If the cost was $3, then the mark-up would be $1 and therefore the selling price would be $4.
So for every $4 selling price, the cost is $3.
So for a selling price of $20, the cost will be 3/4 x $20 = $15.
Mark-ups are always the profit as a % of cost (and this question actually says so anyway).
(If you want more examples then watch the lecture on Mark-ups and Margins in the Paper F2 section of this website.)
Thanks a lot tutor, I really don’t know where I’d be without your help
God bless you
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