US CMA Part 2 · Chapter 6 · Question 14 of 22
Market research shows customers will pay $150 for a new kitchen appliance. Jesmond Home requires a profit margin of 20% of the selling price. Under target costing, what is the maximum allowable cost per unit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $120
Explanation
Target cost = target price - required profit = $150 - (20% x $150) = $150 - $30 = $120. Target costing starts with the market price and works back to the cost that must be achieved, often through value engineering. $125 would apply a 20% markup on cost instead of a 20% margin on price.
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