CMA Final · Strategic Cost Management · Target Costing
Kaveri Appliances expects to sell a mixer-grinder at a market price of Rs 4,000 per unit. The company requires a profit margin of 20% on selling price. What is the target cost per unit?
The target cost is Rs 3,200 per unit. Under target costing, cost is market price less the required profit; 20% of Rs 4,000 is Rs 800, so allowable cost is Rs 3,200. Treating the margin as a markup on cost gives a wrong figure.
- ARs 3,200Correct
- BRs 3,333
- CRs 3,000
- DRs 4,800
Explanation
Target profit = 20% x 4,000 = Rs 800. Target cost = selling price - target profit = 4,000 - 800 = Rs 3,200. Rs 3,333 wrongly treats the margin as a markup on cost (4,000/1.2).
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