(Target Costing & Learning Curve) A company is developing a new specialized product with a target selling price of Rs. 2,000 per unit. The company requires a profit margin of 25% on sales. The first batch of 50 units will take 200 labour hours in total. The workforce is expected to follow a 90% learning curve (index = -0.152) until the 4th batch is completed. If the standard labour rate is Rs. 150 per hour and other variable costs total Rs. 800 per unit, what is the expected target cost gap for the first 4 batches (200 units)?

Correct answer: D) Rs. 0 (Expected cost is below target cost)

Explanation

Target Revenue for 200 units = 200 * Rs. 2,000 = Rs. 400,000. Target Profit (25% on sales) = Rs. 100,000. Total Target Cost = Rs. 300,000. Expected Cost Calculation: Learning curve for 4 batches (200 units): Y=ax^b. Y=200 hours*4^-0.152 = 200*0.81 = 162 hours per batch. Total expected hours for 4 batches = 162*4 = 648 hours. Labour cost = 648 hours*Rs. 150 = Rs. 97,200. Variable costs = 200 units*Rs. 800 = Rs. 160,000. Total Expected Cost = 97,200 + 160,000 = Rs. 257,200. Since expected cost (257,200) is lower than Target Cost (300,000), there is NO gap.