ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement
Zeta Ltd plans to launch a new product. Market research shows customers will pay $80 per unit. The company requires a profit margin of 25% on selling price. Under target costing, what is the target cost per unit?
The target cost is $60 per unit. Target costing deducts the required profit margin from the market-determined selling price. A 25% margin on $80 is $20, leaving $60 as the maximum permitted cost.
- A$60Correct
- B$64
- C$100
- D$55
Explanation
Target cost = target selling price less required profit. Profit = 25% x $80 = $20, so target cost = $80 - $20 = $60. The $64 option wrongly applies a 20% margin (as a markup-style error), and $100 adds the profit instead of deducting it.
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