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ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement

A company is value engineering a product. Current unit cost is $80 and the target cost for a required margin is $68. Redesign of components is expected to save $7 per unit and a change of supplier a further $3.50 per unit. What is the position after these actions?

Savings total $10.50, reducing unit cost from $80 to $69.50. That is still above the $68 target, so a cost gap of $1.50 per unit remains and further reductions are needed.

  1. ATarget cost is met with $2.50 per unit to spareCorrect
  2. BTarget cost is met exactly
  3. CA cost gap of $1.50 per unit remains
  4. DA cost gap of $5.00 per unit remains

Explanation

Total savings are 7 + 3.50 = $10.50, giving a new cost of 80 - 10.50 = $69.50. Target is $68, so a gap of $1.50 remains. Option 'met with spare' wrongly adds savings to the target instead of deducting from the cost.

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