Question

Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new product with the following estimates: $ Estimated market price Annual demand Life cycle Target profit 1.200 100,000 units 5 years 30% return on sales Required: 1. Compute the target cost of this product. Target Cost 2. Compute the target cost if Majesty wants a 40 percent return on sales. Target Cost 3. Compute the target cost if Majesty wants a 15 percent return on sales. Target Cost

Answer 1

1. Target cost = selling price - target profit

= 1,200 - 360 (30% of 1,200)

= 840 per unit

2. Target cost = selling price - target profit

= 1,200 - 480 (40% of 1,200)

= 720 per unit

3. Target cost = selling price - target profit

= 1,200 - 180 (15% of 1,200)

= 1,020 per unit