ACCA Applied Skills · Performance Management · Target costing
Zeta Co plans to launch a new product. Market research suggests a selling price of $80 per unit. Zeta requires a margin of 25% on selling price. The current estimated cost of the product is $64 per unit. What is the cost gap per unit?
The cost gap is $4 per unit. The target cost is $60, being the $80 price less the 25% margin of $20. The current estimated cost is $64, so costs must fall by $4 per unit to achieve the required profit.
- A$4Correct
- B$16
- C$20
- D$0
Explanation
Target profit = 25% x $80 = $20. Target cost = $80 - $20 = $60. Cost gap = estimated cost $64 - target cost $60 = $4. Option B ($16) wrongly compares price with cost, ignoring the required profit, and option C is the profit itself.
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