CMA Final · Strategic Cost Management · Target Costing
Kaveri Motors has a target selling price of Rs 60,000 per unit and requires a return of 15% on selling price. The current estimated cost is Rs 54,000 per unit. What is the cost gap that must be closed through value engineering?
The cost gap is current cost minus target cost. Target profit is 15% of Rs 60,000, which is Rs 9,000, so target cost is Rs 51,000. Against the current cost of Rs 54,000, the gap to be eliminated by value engineering is Rs 3,000 per unit.
- ARs 6,000
- BRs 3,000Correct
- CRs 9,000
- DRs 5,400
Explanation
Target profit = 15% x 60,000 = 9,000, so target cost = 51,000. Cost gap = current cost 54,000 - 51,000 = Rs 3,000. Rs 6,000 ignores the profit requirement (price minus cost). Rs 9,000 is the profit itself, not the gap.
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