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Hello sir,
I was going through the online quiz of target costing, when i reached question 5 i tried answering it, somehow i don’t understand the question or i don’t know the particular method to solve it, if Mr.mofat gets to answer this query, sir know that i have watched all the explanatory videos and i have understood the part after example 1 where you go further in depth about a variation to 1 and how it is to be faced.
here is the question sir : https://imgur.com/a/pRyrz
I don’t understand why
target cost = 100/120×600
why and how 100 ???
i would highly appreciate it if you could briefly explain how to go about this sum.Thanks in advance.
The mark-up is 20% of cost. So for every $100 cost, they add on $20, and the selling price would be $120.
Putting it the other way round, for every $120 selling price, the cost will be $100.
So….if the selling price is $600 then the cost will be 100/120 x $600 = $500.
(and it obviously checks – $500 + (20% x $500) = $600.
Sir,
1. Are we assuming that for every $100 cost as in (for every 100% assumed as cost) & they add on $20 as in (required markup is 20% of cost)?
2. Why are we not taking the expected production cost $520 instead of assuming 100?
3. When we see the word *expected* before any prices (e.x. expected production cost $520 p.u..) what does it mean exactly?
– does it suggest different actions under different prices/costs?1. Yes – that is what the word mark-up means.
2. The target cost is based on the expected selling price. It is then compared with the actual cost to determine the cost gap. I do suggest that you watch the lectures again because it seems that you have not understood the concept.
3. Expected production cost means that 520 is what they think the production cost will be!
I will go through the lecture slowly and surely as advised, thank you for you time, help and patience sir.
Have a wonderful evening. 🙂
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