I don’t know which example you are referring to. However on your figures, if they want a mark-up of 25% on cost and if the selling price is $50, then the target cost is $40 (not $10. $10 is the profit they want to make).

Please sir I NEED TO KNOW HOW TO SOLVE THIS QUESTION the selling price of product ZIGMA is set to be $250 for each unit and sales for the coming year are expected to be 500 units if the company requires a return of 15%in the coming year on its investment of $250000in product ZIGMA the target cost for the coming year is how do i proceed with this question the choices are 145 155 165 175

Targeted revenue is 500 x $250 = $125000 The required ROI 15% from $ 250000 is $37500 Targeted cost is $125000-$37500 = $87500 Targeted cost per unit = $87500/500 units = $175

Why would we divide 50 by 150? The $50 is the realistic selling price. This is equal to cost + profit. We are told the profit we want is based on the cost. So we take the cost x as 100% and the profit as 25% this will give you the selling price at 125% x. We know this is $50 dollars so to get x we divide by 125/100 You could also have this as an equation. 1x + .25x = 50 1.25x = 50 x = 50/1.25 x=40

Thank you John. Based on your presentation target costing is effectively the same as conventional cost plus pricing. Why the target cost is always calculated on a per unit basis according to your explanation?

acca324 says

in example 2, what is the assumption that the 30% of 5M is the profit objective when the problem did not say so?

John Moffat says

But the question does say so!! It says that a return on investment of 30% is required.

binidire says

Thank you.

John Moffat says

You are welcome 馃檪

SusanKurian says

therefore for every 100 of cost the Selling price is 125, i.e, 100/125*50=$40

and therefore target cost is $50-$40 = $10

is that correct?

John Moffat says

I don’t know which example you are referring to. However on your figures, if they want a mark-up of 25% on cost and if the selling price is $50, then the target cost is $40 (not $10. $10 is the profit they want to make).

chocolatestarfish says

Please sir I NEED TO KNOW HOW TO SOLVE THIS QUESTION

the selling price of product ZIGMA is set to be $250 for each unit and sales for the coming year are expected to be 500 units if the company requires a return of 15%in the coming year on its investment of $250000in product ZIGMA the target cost for the coming year is

how do i proceed with this question

the choices are

145

155

165

175

victorgoh says

Targeted revenue is 500 x $250 = $125000

The required ROI 15% from $ 250000 is $37500

Targeted cost is $125000-$37500 = $87500

Targeted cost per unit = $87500/500 units

= $175

Kungfuash says

Hi John,

In Target Costing, you gave example of calculating TC when profit was 25% of/on Cost and you calculated by 25/125*50= $10.

Why here we are calculating by 100/150*10.5 = $7 ?

Why not same as 50/150 * 10.50 = $3.5 TC ?

Thanks

agu3ro says

You can also say,

TC= (125/100 )x = 50

TC= (100/125)50 = 40

adch111 says

Why would we divide 50 by 150?

The $50 is the realistic selling price. This is equal to cost + profit.

We are told the profit we want is based on the cost.

So we take the cost x as 100% and the profit as 25% this will give you the selling price at 125% x.

We know this is $50 dollars so to get x we divide by 125/100

You could also have this as an equation.

1x + .25x = 50

1.25x = 50

x = 50/1.25

x=40

Ebtehal says

It’s very helpful, thank you.

John Moffat says

You are welcome 馃檪

nhelal89 says

thank you

John Moffat says

You are welcome 馃檪

phantomghostly says

whts is the easiest way to understand maxmin, Maximin. and Minimax

John Moffat says

I do not understand why you have posted this as a comment on a lecture on target costing!!

Maximin etc. are all explained in my free lectures on risk and uncertainty.

John Moffat says

No, no – it is nothing like cost plus pricing!!

With cost plus pricing we start with the cost and add on a % to get the selling price. But there is then no incentive to reduce costs.

With target costing we start with a realistic selling price and then decide what the maximum cost has to be to be able to get the desired profit.

alie2018 says

Thank you John. Based on your presentation target costing is effectively the same as conventional cost plus pricing. Why the target cost is always calculated on a per unit basis according to your explanation?