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There is a target cost gap question in BPP practice & revision kit. Sorry seems to be an easy question, but can’t get my head around the target profit calculations.
SP $10
Target profit 25% on cost
Current cost $8.40 per unit
How are we going to calculate target profit.If the target profit is 25% of cost, then for every $100 cost, the profit is to be $25, and therefore the selling price would be $125.
Or, putting it the other way round, for every $125 selling price, the profit will be $25, which is 25/125 = 20% of selling price.Therefore for a selling price of $10 the target profit is $2 and the target cost is $8.
(Have you watched my free lectures on target costing? The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.)
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