Sonora,Inc.is launching a new product that it estimates will sell for $25 per unit.Annual demand is estimated to be 70,000 units.Sonora estimates that using its current manufacturing technology,it can manufacture the units for $23 per unit,but if it purchases a new machine,the units can be manufactured for $22 per unit.Sonora has a target profit of 20% return on sales.Under target costing,what is the target cost for the new product?
A)$20
B)$22
C)$23
D)$25

Question

Quizplus · Accepted Answer

The target cost is calculated by subtracting the desired profit margin from the selling price. With a selling price of $25 and a target profit of 20% on sales, the target profit per unit is $5 (20% of $25). Therefore, the target cost is $25 - $5 = $20.