I have just started studying CIMA a few days ago. I've got the kaplan study materials and I'm currently on chapter 7 but I have a question about chapter 3 (overhead analysis - profit margin).
I'm not sure if others have the same study material (or maybe some higher level students can help me out!) so here it is:
WP Ltd manufactures product A. Data for A are are follows:
Material cost $7
Labour cost $18
Labour hours 2
Production overhead absorption rate $6 per direct hour
Mark-up for non-production costs 5% of total production cost
WP Ltd requires 15% return on sales revenue from all products. Calculate the selling price for product A, to the nearest cent.
The solution given is:
(shortened) the full cost is calculated to $38.85
Then the profit mark-up is added by (15/85* x $38.85) so the selling price is $45.71
It says *Always read the question data carefully. The 15% required return is expressed as a percentage of the sales revenue, not as a percentage of the cost.
I haven't had any problems so far but this one thing is bugging me! I just don't understand why the 15 (percent) was divided by 85? Where did the 85 come from? Maybe I'm just having a pregnancy brain moment.. please help!