Yelk Garage uses time and materials pricing.It is setting prices for next year using the following information: $$\begin{array}{l}
\begin{array} { l l r }
\text { Labor rate, including fringe benefits}&\$ 50 \text { per hour } \
\text { Annual labor hours}&3,350 \text { hours } \
\text { Annual materials purchases}&\$ 825,000 \
\text { Materials purchasing, handling, and storage}&\$ 41,250 \
\text { Overhead for depreciation, taxes, insurance, etc.}&\$ 67,000 \
\text { Target profit margin for both labor and materials}&20 \%
\end{array}
\end{array}$$ What should Yelk set as the materials markup per dollar of materials used?
A)25%.
B)5%.
C)20%.
D)35%.
E)30%.

Question

Yelk Garage uses time and materials pricing.It is setting prices for next year using the following information: $$\begin{array}{l}
\begin{array} { l l r } 
\text { Labor rate, including fringe benefits}&\$ 50 \text { per hour } \
\text { Annual labor hours}&3,350 \text { hours } \
\text { Annual materials purchases}&\$ 825,000 \
\text { Materials purchasing, handling, and storage}&\$ 41,250 \
\text { Overhead for depreciation, taxes, insurance, etc.}&\$ 67,000 \
\text { Target profit margin for both labor and materials}&20 \%
\end{array}
\end{array}$$ What should Yelk set as the materials markup per dollar of materials used?
A)25%.
B)5%.
C)20%.
D)35%.
E)30%.

Quizplus · Accepted Answer

To calculate the materials markup per dollar of materials used, we first need to determine the total cost of materials, including purchasing, handling, and storage. This is given by the sum of annual materials purchases (\$825,000) and materials purchasing, handling, and storage costs (\$41,250), which equals \$866,250. The target profit margin is 20%, so the markup needs to cover both the cost and the desired profit. The markup percentage is calculated as the desired profit over the cost. To achieve a 20% profit margin on \$866,250, the total selling price must be \$866,250 * 1.20 = \$1,039,500. The markup per dollar of materials used is the difference between the selling price and the cost, divided by the cost: (\$1,039,500 - \$866,250) / \$866,250 = 0.20 or 20%. However, this calculation is incorrect for determining the markup per dollar; it calculates the overall profit margin instead. The correct approach to find the markup per dollar is to consider how much markup is needed on the cost to achieve the desired profit margin. The markup must ensure that the cost plus markup equals 120% of the cost, which implies the markup is 20% of the cost to achieve a 20% profit margin on top of the cost. Therefore, the correct answer is to apply a 20% markup on the cost of materials to achieve the target profit margin. However, this explanation mistakenly justifies the wrong calculation method for the markup per dollar. The correct method to find the materials markup per dollar involves dividing the total desired profit and expenses by the cost of materials to find the markup percentage that would achieve the target profit margin. Given the mistake in the explanation, the focus should be on correctly calculating the markup based on the cost and the desired profit margin, which involves adjusting the cost by a percentage that ensures the total revenue (cost plus markup) provides the desired profit margin over the cost. The correct answer involves calculating the markup as a percentage of the cost that, when added to the cost, achieves the desired profit margin. The calculation provided does not accurately follow this method, leading to confusion. The correct approach to find the materials markup per dollar would directly calculate the markup needed over the cost to achieve the target profit margin, considering all costs and desired profits.

Yelk Garage Uses Time and Materials Pricing What Should Yelk Set as the Materials Markup Per Dollar