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: $ 1,300 96,000 units Estimated market price Annual demand Life cycle Target profit 4 years 23% return on sales Required: 1. Compute the target cost of this product. 2. Compute the target cost if Majesty wants a 40 percent return on sales. 3. Compute the target cost if Majesty wants a 9 percent return on sales. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Compute the target cost of this product. Target Cost Required Required 2 >

Answer 1

1)

Target Cost

Estimated Selling price = $1,300

Company wishes to have 23% return on sales.

So their Target cost will be:-

$1,300-($1,300*23%)

$1,300 - $299

Target Cost = $1,001/unit

2)

Target cost When company needed 40% return on sales

Estimated S.P = $1,300

40% return on sales

Target Cost = $1,300-(1300*40%)

= $1,300 - $520

= $780/unit

3)

Target Cost when company needed 9% return on sales:-

Estimated S.P = $1,300

9% return on sales

Target Cost = $1,300-($1,300*9%)

= $1,300 - $117

= $1,183

Selling price * targeted return means that it is the targeted profit desired by the company. From selling price while we reduce that desired profit we will get target cost for each units.