Target Costing question...

gabriellenlewis

- The price at which product will be sold is £30
- Orders for 20000 units
- Fixed costs are £180000
- Labour rate is £15 per hour
- Required profit margin is 40%
- Material requirement is 250 g per unit
- Material cost is £16 per kg

Use this table to work out the target labour time per unit (minutes):

Sales price per unit:
Profit margin:
Total costs:
Fixed cost per unit:
Material cost per unit:
Max labour cost per unit:

Target labour time per unit (minutes):


I can work out sales price per unit, fixed cost per unit and material cost per unit correctly but I can't see how to find the labour cost if we don't have the number of hours and why is the profit margin 12 if it's already given as 40%?

gabriellenlewis

Actually, I think i have it...

fixed cost per unit: £9, variable cost per unit: £4.

using profit margin formula:

profit / sales x 100 = 40%

(x /600000) x 100 = 40

x = £240000 profit.

profit formula:

sales - costs = £240000

600000 - 180000 - 80000 - 15h = 240000

15h = -100000
h = -6666.67

6666.67 hours x £15 per hour = £100000

100000 / 20000 units = £5 per unit labour cost.


Target labour time:

6666.67 hours / 20000 units = 0.3 hours

0.3 x 60 = 20 mins.