How to work out target labour time per unit (minutes) ?

ayshazeemalik

The price which the will be sold is £30, 20,000 units
fixed cost are £180,000
labour rate is £15
profit margin is 40%
material requirement is 250g per unit
material cost is £16 per kg

I just dont understand how I work out the target labour time per unit (minutes)?

Rinske

Start at the top and work down. If you slot it in a small profit statement and see which you can work out, you can then see how you can work out the labour costs.

Sales = 20,000 * 30 = 600,000 (cost of sales plus profit)
Profit = 40% * 600,000 = 240,000 (40% of sales (margin)
Cost of sales = 600,000 - 240,000 = 360,000

Cost of sales exists of:
Fixed costs of 180,000
Material cost 80,000
(20,000 units of 250gr each is 5000kg * 16 per kilo)
Labour cost 100,000
Ideal labour cost is 360,000 - 180,000 - 80,000 = 100,000)

So if we want the labour cost to be 100,000 and the rate is £ 15 per hour, we want the staff to spend 6667 hours on creating 20,000 products. 6667 hours divided by 20,000 is 0.33 times 60(minutes instead of hours) means 20 minutes per product.

Hope that helps!