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I do not understand how increasing selling price will not reduce the target cost gap. For example if the selling price of a product is $100 and gross profit margin on selling price is 10%, then target cost is $90. Suppose estimated cost calculated is 100.
Target cost gap = 100- 90 =10
If we increase selling price from 100 to 130, keeping the profit margin same, our target cost will be 117, which is already more then our estimated cost i.e 100.
So we are able to successfully cover the gap …and even $7 extra we are saving by increasing selling price.
Why it is written in the book that increasing selling price cant close the gap ???
Thanks in advanceIncreasing the selling price would make the cost gap less.
However the whole point of target costing is to start from a ‘reasonable’ selling price. i.e. the maximum selling price that you think the market will pay, taking into account (for example) the prices that the competition charge.
If they have started with a reasonable selling price, then they will not expect that they will be able to increase the price.
Why are you not watching the free lectures?? I mention this in the lectures and you really cannot expect me to retype what I say in the lectures 🙂
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