Question

Suppose your company is planning to introduce a product on the market. The company estimates the production cost of the product at $135 per unit, and the product can only be sold for a maximum price of $150 per unit, otherwise customers switch to competitors. Your company wants a profit margin of 15%. What is the cost gap on the product and the amount by which should be adjusted to achieve the desired target cost per unit on the product?

Answer 1

Maximum Sales Price = $ 150

Now given the profit Margin of 15%, therefore Profit in $ terms = Sales Price x Profit margin

Profit in $ terms = $ 150 x 15% = $ 22.5

Now, the required/ Target cost of the product = Sales - Proft = $ 150 - $ 22.5 = $ 127.5

However, the actual production cost = $ 135

Cost Gap = Actual Production Cost - Target Production Cost

Cost Gap = $ 135 - $ 127.5 = $ 7.5

Therefore are actual production cost is higher by $7.5 with respect to its target/ Required cost. Actual Production Cost needs to be reduced by $ 7.5 in order to achieve the required profit margin of 15% on the maximum Sales price of $ 150.