Marshall Grocery Delivery Service reports the following information: Direct labor rate per hour Non-materials related overhead per hour Materials-related overhead Target profit margin The materials markup per dollar of materials cost is: Materials markup $ 20 $ 25.80 4% of Direct materials cost 20%
The Correct Answer and Explanation is :
To determine the materials markup per dollar of materials cost, we need to calculate the cost associated with materials-related overhead and the profit margin. Here’s the breakdown:
Given:
- Direct labor rate per hour: $20
- Non-materials related overhead per hour: $25.80
- Materials-related overhead: 4% of direct materials cost
- Target profit margin: 20%
Step 1: Materials-related overhead
The materials-related overhead is 4% of direct materials cost. For every dollar of direct materials cost, the overhead is:
[
\text{Materials-related overhead} = 0.04 \times \text{Direct materials cost}
]
Step 2: Target profit margin
The target profit margin is 20%, which is applied to the total cost (direct materials cost + materials-related overhead). For every dollar of direct materials cost, the profit margin is:
[
\text{Profit margin} = 0.20 \times (\text{Direct materials cost} + \text{Materials-related overhead})
]
Substituting the materials-related overhead into the equation:
[
\text{Profit margin} = 0.20 \times (1 + 0.04)
]
[
\text{Profit margin} = 0.20 \times 1.04 = 0.208
]
Step 3: Total materials markup
The total materials markup per dollar of materials cost includes both the materials-related overhead and the profit margin:
[
\text{Materials markup} = 0.04 + 0.208 = 0.248
]
Final Answer:
The materials markup per dollar of materials cost is 24.8%.
Explanation:
The materials markup accounts for the indirect costs of handling materials (materials-related overhead) and the target profit margin. The 4% materials-related overhead reflects expenses directly tied to materials handling. The 20% target profit margin, applied to the combined cost of materials and overhead, ensures the company meets its profitability goals. By summing these components, we get a markup of 24.8%, which is applied to each dollar of direct materials cost to ensure all costs and profit expectations are covered effectively.