If a plant sells for $1.50 and the business uses a 20% profit margin, what is the wholesale cost?

• A. $1.25
• B. $1.20
• C. $1.30
• D. $1.35

Answer: (A)

Understanding whether the 20% profit margin is a markup on wholesale cost or a margin on the selling price is what this question hinges on. If the profit is 20% of the wholesale cost, then selling price equals cost plus 20% of cost, i.e., cost × 1.20. With a selling price of 1.50, the wholesale cost is 1.50 ÷ 1.20 = 1.25. So the wholesale cost is 1.25. This distinction matters because treating the 20% as a percentage of the selling price would yield 1.50 × 0.80 = 1.20 for cost, which is different. In this context, a markup on cost gives 1.25 as the correct cost.