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target costing

This topic has 2 replies, 2 voices, and was last updated 4 years ago by John Moffat.

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September 12, 2020 at 2:47 pm #585331
Noah098
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a company has a target mark-up of 25% and sells in to a competitive market where teh market price is 120$ per unit. the company’s current costs per unit are $46 for variable costs and $60 for Fixed costs and it has a budgeted output of 10,000units.
answer- 12000units
sir i do not understand how this answer is arrived at?
September 12, 2020 at 2:49 pm #585332
Noah098
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the main question was what is the minimum production required to close the target cost gap?
September 12, 2020 at 3:52 pm #585352
John Moffat
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The target cost is 100/125 x $120 = $96
The variable costs are $46 and therefore the fixed costs need to be absorbed at $50 per unit.
Since total fixed costs are $60,000, for the absorption rate to be $50 per unit they need to produce $60,000/50 = 12,000 units.
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