Last year an operation achieved a 28 percent labor cost on sales of $1,500,000. For next year, the manager predicts an 8 percent increase in the prices the operation will pay for labor. The manager will also increase the operation's menu prices by 5 percent. What should be the manager's best estimate for next year's labor cost percentage?

Question

Quizplus · Accepted Answer

The labor cost for last year was 28% of $1,500,000, which equals $420,000. With an 8% increase in labor costs, next year's labor cost will be $420,000 * 1.08 = $453,600. The sales are expected to increase by 5%, so next year's sales will be $1,500,000 * 1.05 = $1,575,000. The labor cost percentage for next year will be ($453,600 / $1,575,000) * 100 = 28.8%.

Last Year an Operation Achieved a 28 Percent Labor Cost