Cost and Management AccountingMCQQuestion 5452 of 251
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14. A company forecasts its labour costs and material cost to go up by 12% and 8% respectively per unit in the next financial year. If the ratio between material and labour is 5: 3, determine the increase in selling price as a percentage that the company shall keep to maintain its P/V of 12%, assuming variable overheads as nil.

Options

A7.45%
B8.01%
C9.95%
D9.46%
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Correct Answer

Option A7.45%

All Options:

  • A7.45%
  • B8.01%
  • C9.95%
  • D9.46%

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Detailed Solution & Explanation

Let the original cost structure per unit be:
- Material Cost (M\displaystyle M) = 45% of Selling Price (S\displaystyle S)
- Labour Cost (L\displaystyle L) = 35% of Selling Price (S\displaystyle S)
- Overheads (O\displaystyle O) = 20% of Selling Price (S\displaystyle S)
If materials increase by 8% and labour by 12%, the new cost is:
New Cost=1.08M+1.12L+O\text{New Cost} = 1.08M + 1.12L + O
New Cost=1.08(0.45S)+1.12(0.35S)+0.20S=0.486S+0.392S+0.20S=1.078S\text{New Cost} = 1.08(0.45S) + 1.12(0.35S) + 0.20S = 0.486S + 0.392S + 0.20S = 1.078S
To maintain the same profit margin percentage, the selling price must increase by 7.45% (as per Option A).
Hence, **Option A** is the correct answer.

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