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please explain in question ii) why the target costing does not include the inspection costs of 100,000
They are included.
Total inspection costs for the remaining 2 years = 2 x 100,000 = 200,000
Remaining products to be made = 250,000
200/250 = 0.8.
This is included in the answer ( at least it is in the ACCA version of the answer).
Regarding requirement ii, in the answer the target cost is calculated by using 25% profit margin, not 20%. Why?
It is to do with the difference between the meaning of profit margin and mark-up.
Profit margin (or gross profit margin) is always with respect to sales. Mark-up is always with respect to costs.
If an item sells for $100 and there is a profit margin of 20%, then the profit is to be $20 and therefore the costs will be $100 – $20 = $80.
However, this means that the mark-up is 20/80 = 25%.
In the question, the selling price is $175; at a profit margin of 20%, the profit must be $35 and the costs must therefore be 175 – 35 = 140. The mark-up is 35/140 = 25%.
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