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Hello Cath,
How to go about a question like this:
An investment of £400M requires a return of 12%.
They could sell 500,000 units for £200 per unit or 160,000 units for £250 per unit. What is the target cost of unit?This type of question was given to someone on the actual P2 OT, and I must say I would’t even know how to make a start on it.
Hi,
The investment cost $400m and they want 12% return – i.e. profit on this investment must be 12% of 400,000,000 = $48,000,000 ( $48 million is required profit)
Ok – so if when this product is being sold at $200 there are 500,000 units are sold. The profit per unit will need to be: 48million/ 500,000 units =£96 per unit
So if selling price = $200
required profit is $96
Target cost will be $104 per unit …To check back – we can see if they sell 500,000 units they will get 500,000 x $96 profit on each sale which equals 48million profit in total ( which is 12% of 400 million).
The other choice – would be solved in the same way – except I assume you mustve misquoted the numbers from the original CIMA question.
If selling price is $250 per unit and demand will be 160,000 units. Then to share the 48million profit across much lower volume of sales – the profit per unit needs to be: 48 million / 160,000units = $300 required profit per unit.
This cant work because
Selling price is $250
profit = $300
target cost would have to be -50 (a negative cost value ) which is not possible.NB) Ive used £s as you have in your example but all CIMA questions like this will be in $ dollars.
Thank you Cath.
I copied the Q from another (student) forum so I don’t know whether the figures are misquoted or not. Providing they are misquoted and the second set of figures provide a valid target cost, what would be the answer to this Q? Is it possible to give a 1 figure answer?
On the other forum the students suggested it was a curveball question and was deliberately tricking students into thinking the answer can be anything else but the target cost you suggested.
Hi,
Yes the could have the same target cost if the question said for example the second selling price was say $404 per unit (when they sold 160,000 units).
Therefore the 48 million profit needs to be shared across 160,000 units so need to make profit of $300 per unit this time.
To make this profit we could have the same target cost as before of $104 and the selling price of $404.So it would be possible to get one answer solution but I not with the numbers you gave originally.
Kind Regards
CathHi,
If this question did come up in the exam as stated, is there any way of contacting CIMA to complain, as this is clearly a wrong answer? If the second set of figures gives a loss, then the two answers would not match to give a solution (providing the answer requires a typed reply rather than multiple choice)?
Hi,
You can contact CIMA after an exam to give feedback on the process or any questions you feel were out of syllabus or unfair.
However, the questions have been through rigorous quality checks and have been worked through by many exam candidates since the launch of the objective tests in 2015 – so its unlikely that the exam questions in the real P1 exam will contain mistakes in any way.This question was derived from a student forum – so not written by CIMA directly
Kind Regards
Cath
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