ICAEW BIP · Chapter 4 · Question 4 of 11
Lynton Ltd is developing a new product. Market research shows a competitive selling price of £220. The company requires a profit margin of 30% of selling price. The current estimated cost of the product is £171. What is the cost gap that must be closed?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) £17.00
Explanation
Target cost = target price less required profit = £220 x (1 - 0.30) = £154.00. Cost gap = estimated cost £171 - target cost £154.00 = £17.00. Lynton must find ways to reduce cost, for example through value engineering, before the product goes into production.
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