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Hi
In the simple example on page 6 of the OT lecture notes, when demonstrating how to calculate the target cost, you went through the full procedure:
-Calculate target return = 1,500,000
-Calculate expected revenue= 2,700,000
-Target cost = (expected revenue – target return)/ units produced= 1,200,000 / 40,000 = $30 per unit
Yet in Example 1 on page 11, as per the answers, the target cost is arrived at by simply dividing the selling price p.u. by the mark up on cost
10.50 / 1.5 = $7.00 per unit
Can you please explain the difference in the 2 questions and why a different technique has been used in both?
Thankyou in advance…OT is a fantastic free resource…..
It is because the objective of the business was different.
There is no rule as to how the company decides on its objective. In the exam you will be told (and usually it will be a mark-up on cost or a margin on selling price).
I assume you have watched the lecture (because I explain this in the lecture) – there is no point at all in using the Course Notes without the lectures because it is in the lectures that we explain and expand on the examples.
Yes I have watched and taken notes on every F5 lecture on OT
In example 1, page 11, the companies objective is described as 50% mark up on cost. Yet the selling price is already defined and we work backwards from the selling price to determine the target cost ($10.5 / 1.5 = $7)
Surely this is an example of working out the TC based on margin on selling price? I cannot see how we are working out a TC based on mark up on cost if the selling price is already determined?
Having an objective of 50% of cost (i.e. a markup) is exactly the same as having an objective of making a margin of 1/3 of selling price.
The examiner can give it in either of the two ways (and does) which makes it important to read the question very carefully.
If the company is currently making a mark-up of 50% of cost on all their other products, then it makes sense to have an objective of 50% of cost on this new product. So we need to ‘work backwards’ to calculate the maximum the cost can be to achieve this objective i.e. the target cost.
@ag1986 said:
HiIn the simple example on page 6 of the OT lecture notes, when demonstrating how to calculate the target cost, you went through the full procedure:
-Calculate target return = 1,500,000
-Calculate expected revenue= 2,700,000
-Target cost = (expected revenue – target return)/ units produced= 1,200,000 / 40,000 = $30 per unit
Yet in Example 1 on page 11, as per the answers, the target cost is arrived at by simply dividing the selling price p.u. by the mark up on cost
10.50 / 1.5 = $7.00 per unit
Can you please explain the difference in the 2 questions and why a different technique has been used in both?
Thankyou in advance…OT is a fantastic free resource…..
In one example you were told that they had a target return on investment, whereas in the other one you were told they had a target mark-up. They are not the same thing.
It is up to the company to decide what their target it – there is no rule – but in the exam you are told.Are you watching the lectures? Because there is no point in using the notes without the lectures. It is in the lectures that we explain and expand on the notes – the notes on their own are not enough.
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