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CMA Final · Strategic Cost Management · Target Costing

Ananya Appliances plans to launch a mixer-grinder. Market research shows customers will accept a selling price of Rs 4,000 per unit. The company requires a target profit margin of 20% on selling price. What is the target cost per unit?

Target cost is the market price less the required profit. With a price of Rs 4,000 and a 20% margin on selling price, profit is Rs 800, so the target cost is Rs 3,200 per unit. Treating 20% as a markup on cost gives a wrong figure.

  1. ARs 3,200Correct
  2. BRs 3,333
  3. CRs 3,000
  4. DRs 4,800

Explanation

Target cost = Target price - Target profit = 4,000 - (20% x 4,000) = 4,000 - 800 = Rs 3,200. Rs 3,333 results from treating the 20% as a markup on cost (4,000/1.20), which is the wrong base. Rs 4,800 adds the margin to the price instead of deducting it.

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