Good morning Sir,
Trust you are doing well.
I am not convince with the answer in question 2 of 5 under target costing(The selling price of a product has been set at $300 per unit, and at that price the company expect to sell 1000 units per year. The company requires a return of 20% p.a on its investment of $1,250,000 in the product. What is the target cost per unit? A) $250 B) $50).
The question asked for the target cost and not the cost gap.
Can you please clarify me on this?
Ask the Tutor ACCA PM
cost gap calculated instead of target cost
3y ago#1The answer is correct at $50.
The require the profit to be 20% x $1,250,000 = $250,000. This is a required profit of 250,000 / 1,000 = $250 per unit.
Since the selling price is $300 per unit, then to achieve the required profit they need the cost to be 300 - 250 = $50 per unit, and so this is the target cost.
(We do not know what the expected cost per unit is, but if (for example) the expected cost per unit was $60, then the cost gap would be $10 because they would need to reduce costs by $10 per unit in order to get to the target cost and hence make the required profit.)
Have you watched my free lectures on target costing? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Sign into reply to this topic.