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 profit margin of 25% of selling price. The current estimated cost is $68. Cost reduction identified so far from the redesign is $5. What further cost saving is needed to reach the target cost?
A further $3 saving is needed. Target cost is $80 minus a 25% margin of $20, giving $60. The current cost of $68 is $8 too high, and the $5 already identified leaves a remaining gap of $3.
- A$3Correct
- B$8
- C$13
- D$5
Explanation
Target cost = 80 less 25% margin ($20) = $60. Current cost is $68, so total reduction needed is $8. Identified savings are $5, leaving $3 still required. Option B ignores the $5 already found, and option C subtracts incorrectly from the price.
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