ACCA Applied Skills · Performance Management · Target costing
Zeta Co plans to launch a new gadget with a market-based selling price of $80 per unit and a required profit margin of 25% of selling price. The initial cost estimate is $64 per unit. Cost reduction is to be achieved only from the $30 per unit component cost, with all other costs fixed. What percentage reduction in component cost is needed to meet the target cost? (Answer to the nearest whole percent.)
The required reduction is 13%. Target cost is $60 (selling price less 25% margin), so the cost gap against the $64 estimate is $4. Because only the $30 component cost can be reduced, the cut is 4/30, about 13%.
- A13%
- B20%
- C27%Correct
- D53%
Explanation
Target cost = 80 x (1 - 0.25) = $60. Cost gap = 64 - 60 = $4. Reduction needed in components = 4/30 = 13.3%, which is not among the options as a different base; recheck: the gap of $4 over $30 is 13%. So the correct figure is 13%.
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