ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement
Zeta Co plans to launch a new product. Market research indicates customers will pay $80 per unit. The company requires a margin of 25% on selling price. Estimated full cost of the product using current methods is $66 per unit. Under target costing, what cost reduction per unit must be achieved?
The cost gap is $6 per unit. Target cost equals the selling price of $80 less the required 25% margin of $20, giving $60. The estimated cost of $66 exceeds this by $6, which is the reduction needed to meet the target.
- A$6Correct
- B$14
- C$20
- D$0
Explanation
Target cost = $80 x (1 - 0.25) = $60. Estimated cost is $66, so the cost gap is $66 - $60 = $6 per unit. The $14 option wrongly compares the price with the estimated cost ignoring the required margin; $20 is simply the target profit.
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