Question

As a new manager of operations, you learn that the company prices its products by using the mark-up on cost approach. You believe that the company is leaving money on the table using this approach instead of the mark-up on selling price. To prove your point, you demonstrate that a 30% mark-up on selling price (or 30% target margin on selling price) for an item that costs $20 would sell for _______ more than the same item with a percent mark-up on cost of 30%.

Group of answer choices

$6.00

$10.00

$8.57

$2.57

Answer 1

Answer: $ 2.57

Case 1: 30% target margin on Selling price:

Cost = $ 20

Let the Selling price = X

Margin = Selling price - Cost = X - 20

Also, Margin = 30% of Selling price

So,

X - 20 = 30% of X

X - 20 = 0.30X

X - 0.30X = 20

0.70X = 20

X = 20 / 0.70 = $ 28.57

Case 2: 30% mark-up on cost:

Cost = $ 20

Selling price = 20 x ( 1 + 30%) = 20 x ( 1 + 0.30) = 20 x 1.3 = $ 26

The difference in the Selling price in the two cases:

28.57 - 26 = $ 2.57

Therefore,

A 30% mark-up on selling price (or 30% target margin on selling price) for an item that costs $20 would sell for $2.57 more than the same item with a percent mark-up on cost of 30%.