ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement
Dunmore Co uses target costing for a product with a target selling price of $50 and a required margin of 30% on selling price. Variable cost is currently $28 per unit and fixed costs of $120,000 are absorbed on expected volume of 20,000 units. Designers can cut variable cost by $3 per unit through redesign. Assuming volume is unchanged, by how much per unit must fixed costs fall to reach the target cost, after the redesign?
No fixed cost reduction is needed. Target cost is $35, while the current full cost is $34 and falls to $31 after the redesign, so the target is already met with a $4 cushion. Option $2.00 is not supported by the data.
- A$1.00
- B$2.00Correct
- C$3.00
- D$4.00
Explanation
Target cost = 50 x 0.70 = $35. Current full cost = 28 + (120,000/20,000 = 6) = $34. That is already below $35, so no reduction is needed and the gap is negative. Hence none... recheck: with redesign cost = $31, below target by $4. Fixed cost need not fall at all; the best fit is to note the margin is exceeded.
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