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PM Chapter 2 Questions Target costing

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    • Hi,

      There are two types of percentage of profit: 1) 20% of Sales, (2) 20% on Cost. In this question you have to find out how much is on sales because cost is not given in the question, instead we have to arrive at the Target Cost. Therefore, it will be 16.67% of sales.
      Concept:
      Let Cost be 100 cost price
      Add: 20% 20
      It becomes= 120= selling price
      Therefore, if sale price is 120 than cost is 100, what if sale price is 100? = 100×100/120=16.67%, means 16.67% of sales.

  5. Hi John,

    For Q5 I did the following calculations:

    Sales revenue $600 脳 5000 = $3,000,000
    Profit required 20/120 脳 $3,000,000 = $500,000
    Total cost $3,000,000 – $500,000 = $2,500,000
    Target cost p/unit $2,500,000 / 5000 = $500
    Cost gap $520 – $500 = $20

    I got the same answer, would my calculations be OK for the exam?

    Thanks,

    Tahsina

    • 250 is certainly not a rate of return (rates of returns are %’ages!).

      They require a return on investment of 20% and therefore they want a profit of 20% x $1,250,000.

      What you are doing would be correct if they wanted a profit on cost (i.e. a profit margin) of 20%.

      It would seem you did not watch my free lectures before attempting the test because this example is similar to example 2 in my lecture.

  14. It took my brain a while to figure out that reverse mathematical operation! I was only convinced when I realized that 20% of 500 (the unknown cost price) is 100 and when added gives us that 600 sale price. Defeated by math…
    Posted for anyone else coming here to figure it out.

    • The selling price is $600.

      For the profit to be 20% of the cost, the cost needs to be 100/120 x $600 = $500, and this is therefore the target cost.

      The estimated cost is actually $520, and therefore the cost gap is 520 – 500 = $20.

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