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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?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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