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Hi, I require help with a target costing question from Open Tuition course notes booklet (page 11, Example 1, Question A)
I don’t understand how the target cost is £7.00/unit, and the solutions do not explain this answer clearly.
But anyway here is the question…
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– Company plans to sell a new product; selling price is £10.50/unit; expect to sell 2,000 units in first year, and 12,000 units in each of year 2 to 5.
– The company wishes to achieve a mark up of 50% on cost.
– Estimated lifetime costs are: manufacturing costs at £6/unit; design and development costs of £60,000; end of life costs of £30,000.
> Required: Calculate the target cost of the product.
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Any help will be great, thanks
Suppose that the cost is X.
They want a profit of 50% or 0.5 of cost – i,e, 0.5X
This means that the selling price has to be X + 0.5X = 1.5X
However, we know that the selling price will be $10.50.
So…..1.5X = 10.50
Dividing by 1.5, X = $7Hope that makes sense.
If you need more practice on this then look at the F3 notes and lecture on ‘mark-ups and margins’
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