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Product X target selling price per unit $ 10
Target profit 25% on cost
Current Cost $8.40 per unitWhich is the target cost gap?
Solutiontarget profit (25% of cost =20% of sales price) = $ 2 Why, could ou please explain the method?
target cost $ 10-$2= $8
target cost gap = $8.40-8$ = $0.40The profit is 25% of cost, so for every $100 cost, the profit is $25 and therefore the selling price is $125.
Or…..putting it the other way round, for every $125 selling price the profit is $25.
So the profit is 25/125 = 20% of the selling price.
can anyone assist me with the below. thanks in advance.
Vista Plc, a mobile phone manufacturer is facing increasing competition from manufacturers of high end smart phones from China. In response to the increased competition, they are considering production of two smart phone versions namely the Vista 100 and the Vista 200. The Marketing department has provided the following details for the two phones:
Phone Market price similar Phones,,,, Estimated production cost
Konje1. K 7,000.00 K 4,000.00
Konje2. K 8,000.00 K 6,500.00
In order for Vista Plc to achieve the return expected by its shareholders, a markup of
40% on sales of all phone sales is required.Required:
a. Calculate the target cost and target cost gap for each of the two phones and explain the significance of your computations.If you ask in this forum, then ‘anyone’ will always be me, because I am the tutor for Paper F5 here.
However two things:
Firstly, why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers – they have answers and explanations. Ask about whatever in the answer that you are not clear about and then I will help.
Secondly, you have obviously not watched my free lectures on target costing and you should. You cannot expect me to type out all of my lectures here 🙂
The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.The target cost for Konje1 is 100/140 x 7,000 = 5,000.
Therefore there is no cost gap.The target cost for Konjje2 is 100/140 x 8,000 = 5,714.
Therefore there is a cost gap of 6,500 – 5,714 = 786As far as the significance is concerned – watch my free lectures 🙂
hi john, this is how i was going about it.
for konje1. (40/140*7000)-7000
=2000-7000
-5000konje2 (40/140*8000)-8000
=2285-8000
=-5714
=6500-5714
786
then i would basically ignore the negative signs.
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