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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Strategic Cost & Performance Management

Case: Kaveri Motors Ltd, Pune, makes auto components. Its market research shows that customers will pay at most Rs 1,200 per unit for a new brake assembly, and the board requires a profit margin of Rs 200 per unit. The current estimated cost is Rs 1,100 per unit. Under target costing, what is the target cost per unit and the cost reduction required?

Target cost is the market price minus the required profit, so 1,200 less 200 equals Rs 1,000 per unit. Since the current cost is Rs 1,100, Kaveri Motors must cut Rs 100 per unit through design and process improvements to meet the target.

  1. ATarget cost Rs 1,000; reduction required Rs 100Correct
  2. BTarget cost Rs 1,200; reduction required Rs 100
  3. CTarget cost Rs 1,000; reduction required Rs 200
  4. DTarget cost Rs 1,100; no reduction required

Explanation

Target cost = target price - required margin = 1,200 - 200 = Rs 1,000. Current estimated cost is Rs 1,100, so the gap to be closed is Rs 100. Option B wrongly treats the selling price as the cost, ignoring the required margin.

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