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Kindly help with the below question.
The Following information is available for a product:
Target Selling Price = $20 per unit
Target Mark-up on cost = 1/3
Estimated Production Cost = $16 per unit
What is the target cost gap for this product?
why is the Target cost = (3/4)* $20 = $15
Cost Gap = $16 – $15 = $1
Please, why the use of 3/4?
Since the mark-up is 1/3 of cost, then for every $3 of cost the profit will be $1 and the selling price will be $4.
Putting it the other way round, for every $4 of selling price the cost will be $3.
So if the selling price is $20, the cost will be 3/4 x $20.