Question

18) Overchkin uses target costing and has designed a new machine that is estimated to sell...

18) Overchkin uses target costing and has designed a new machine that is estimated to sell on the market at a price of $ 10,280. The company wishes to make profit margin 0% and currently estimated form the design work undertaken that it will cost $8,640

based on the above figures, what will the target cost gap be?

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Answer #1

Target costing is an approach to determine a product's life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit. It involves setting a target cost by subtracting a desired profit margin from a competitive market price.

Here,

Estimated Sales Price = $ 10280

Profit margin = 0%

Target Cost = Estimated Sales Price - Desired Profit

Target Cost = 10280 - 0 = $10,280

Target Cost Gap = Estimated Cost - Target Cost

Target Cost Gap = 8640 - 10280

Target Cost Gap = -$1640

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