CAF-5 · Chapter 17 · Question 5 of 20
(Target Costing & Pricing) A company intends to launch a new product with a highly competitive target selling price of Rs. 500. The board of directors mandates a target profit margin of 20% on cost. Currently, the expected actual cost to manufacture the product is Rs. 430. What is the Target Cost Gap?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 13.33
Explanation
The required margin is 20% on cost, meaning Sales = Cost * 1.20. Target Cost = Target Sales / 1.20 = Rs. 500 / 1.20 = Rs. 416.67. Cost Gap = Expected Cost (Rs. 430) - Target Cost (416.67) = Rs. 13.33.
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