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April 14, 2015 at 3:48 am
I will like to ask for clarification on the following question which I have now started doing in preparation for June 2015 exams from the BPP exam kit:
Que: Given the following information what is the target cost gap for product X?
Product X target selling price per unit
Target profit $10
Current Cost $ 8.40 per unit
I thought it was easy and calculated came up with $0.40
(10 x 25% = $2.50, then , 10 – 2.5 =7.5
Gap – ($8.40 – $7.50=$0.90)
but the answer was $0.40)
I don’t understand why even though the calculation given at the back of the book in answers was:
$10 x 20% = 2, then , 10 – 2 = 8
Gap – ($8.40 – $8.00 = $0.40)
Why did they use 20%?
It is confusing to me because I know the question asked for 25% ON COST at which i first interpreted it to be 25% of 8.40
But when i calculated it this way there was no answer options if i did that.
I will gratefully appreciate your assistance.
I hope i explained myself properly
John Moffat says
April 14, 2015 at 7:35 am
In future you must ask this sort of question in the Ask the Tutor Forum (as I told you before) and not as a comment on a lecture.
First, the whole point of target costing is that the target cost is calculated from the selling price (and is then compared with the actual estimated cost). Watching the lecture should help you on this.
Secondly, if they want a markup of 25% of cost, then for every $100 cost, the profit would be $25, and therefore the selling price would be $125.
Putting it the other way round, for every $125 selling price, the profit will be $25, which is 25/125 = 20% of the selling price.
April 15, 2015 at 4:10 am
ok thanks sir. and
I apologise about asking the question here, I have never used the tutor forum before as studying with open tution is quite new to me. I guess I misunderstood where you meant when you told me that I should use the tutor forum for these types of questions.
I will further acquaint myself with open tution so that this mistake doesn’t happen again. Sorry about that.
thanks to the response to the question.
February 27, 2015 at 11:12 am
ok just finish with it. thanks a lot
February 23, 2015 at 6:59 am
Yes – I invented it just to explain about cost gap
February 23, 2015 at 1:44 am
Great Lecture. I just have one question…. where did you get the $34 that was used as the estimated actual cost? Was that amount just use to show how you work out the cost gap?
February 27, 2015 at 10:27 am
janelle in the example the $34 was just used to explain the the cost gap. but this $34 could come from the costing of a product using either the traditional method of costing( Absorption Costing) or the mordern method of costing( Activity Base Costing)
February 27, 2015 at 10:40 am
Or, as I explain in the next lecture, from life cycle costing
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