Question

Rami Industries wants to launch a new product (K2) in the market. The company expects 30%...

  1. Rami Industries wants to launch a new product (K2) in the market. The company expects 30% margin on selling price. The current market price of the similar product is $300. The production cost of this product currently comes around $240 per unit.

Required: Calculate the reduction required in cost to meet the target cost per unit. (20 words)

[Marks: 5]

  1. PLC Industries has developed a new product called K2 with a full cost of $730. The company desires a 20% mark up on selling price.

Required: If the company adopts cost plus pricing method for the selling prices, calculate the mark up and the selling price of K2. (25 words)   

[Marks: 5]

Business   Accounting   
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Homework Answers

Answer #1

Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product

As current market price = $300 ..... (Customer willing to buy at this price only )

Target cost = Current market price - Company's margin

=$300-$ (300*30%)

=$210

Current production cost = $240

Reduction required to in cost to meet target cost per unit = Current production cost- Target cost per unit

=$240-$210

=$30

2)Under cost plus pricing method Full cost is added by the required margin by company

Full Cost ........$730

Margin 20% $182.5.............

Target Selling price per unit ...$ 912.5

(Margin 20% on selling price that means cost is 80 percent of sales ie if sp = 100 margin 20% = 20 means cost = 80)

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