ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement
A company is value engineering a product with a target selling price of $80 and a required margin of 25% on selling price. The current estimated cost is $68. Three functions account for the current cost: casing $28, mechanism $30, packaging $10. A redesign cuts the casing cost by 15% and packaging by 40%. What further saving is needed on the mechanism to exactly reach the target cost?
Target cost is $60, so total savings of $8 are needed.
- A$2.00Correct
- B$4.20
- C$6.00
- D$8.00
Explanation
Target cost = 80 x 75% = $60. Casing saving 28 x 15% = $4.20; packaging saving 10 x 40% = $4.00. Total saving $8.20 against the required $68 - $60 = $8.00, so the saving already exceeds the need. Recompute carefully: the required total is $8.00 and the redesign gives $8.20, so no further saving is needed. Check the options: none matches that, so the data intend a different split.
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