CMA Final · Strategic Cost Management · Target Costing
Meera Electronics has a target selling price of Rs 900 per unit and a target profit of Rs 180 per unit. The current estimated cost is Rs 810 per unit. The cost gap is to be closed by reducing component cost only, which is currently 50% of the current cost. By what percentage must component cost fall?
Component cost must fall by 22.2%. Target cost is Rs 720, so the gap against Rs 810 is Rs 90. Since components cost Rs 405, the whole gap falling on them requires 90/405, about 22.2%. Using total cost as base gives 11.1%, which is wrong.
- A22.2%Correct
- B10%
- C11.1%
- D20%
Explanation
Target cost = 900 - 180 = 720. Gap = 810 - 720 = 90. Component cost = 50% x 810 = 405. Reduction = 90/405 = 22.2%. 11.1% wrongly uses total cost (90/810).
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