Hi everyone, I just started studying for BEC a couple of weeks ago and am using Becker. I am on B2 and am very lost.
Can someone explain what is going on in this question. I understand that this is more algebra than accounting here but I am not sure how they derived the 85% of sales from the equation: Profit = Sales – Costs.
Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?
a. $1,980
b. $2,277
c. $1,935
d. $2,329
Explanation
Choice “d” is correct. Since a 15% profit is desired, the cost of $990,000 would be 85% of sales. (Remember that profit + cost = sales.) Thus, sales are $1,164,700 ($990,000 ÷ 85%). $1,164,700 ÷ 500 units equals $2,329 per unit.
Choice “b” is incorrect. The 15% margin should be based on sales, not on costs.
Choice “a” is incorrect. $1,980 is the cost per unit, not the selling price per unit. In order to earn the desired 15% profit, the selling price would have to exceed this amount.
Choice “c” is incorrect. If a profit margin of 15% is to be achieved, the target price cannot be less than the cost per unit of $1,980
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