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10 S Company is a manufacturer of multiple products and uses target costing. It has been noted that Product P currently
has a target cost gap and the company wishes to close this gap.
Which of the following may be used to close the target cost gap for product P?A Use overtime to complete work ahead of schedule
B Substitute current raw materials with cheaper versions
C Raise the selling price of P
D Negotiate cheaper rent for S Company’s premisesThe answer is given out to be B. But I am not getting it. Since using cheaper raw materials would compromise the product quality/yield 🙁
The primary objective of target costing is to reduce the cost to the target cost.
Certainly cheaper raw materials may reduce quality, and therefore they might not choose to do that and look for other ways of reducing cost.
However, the question does not say they will substitute cheaper materials, but that they may. Also, the other options available will certainly not reduce the cost.
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