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cost gap calculated instead of target cost

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › cost gap calculated instead of target cost

  • This topic has 1 reply, 2 voices, and was last updated 1 month ago by John Moffat.
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  • November 30, 2022 at 8:48 am #672908
    kila
    Member
    • Topics: 1
    • Replies: 5
    • ☆

    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?

    November 30, 2022 at 9:12 am #672914
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    The 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.

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