TwoShaft Inc. manufactures a wide variety of parts for recreational boating, including boat engines. The component is purchased by OEM (Original Equipment Manufacturers) such as Mercury and Honda, for use in the larger and more powerful outboards. The units sell for $660, and sales volume averages 32,000 units per year. Recently, TwoShaft's major competitor lowered the price of the equivalent part to $590. The market was very competitive, and TwoShaft realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year: The target cost for maintaining current market share and profitability is (round to nearest cent):
A)$466.61.
B)$417.12.
C)$396.61.
D)$390.61.
E)$460.61.

Question

TwoShaft Inc. manufactures a wide variety of parts for recreational boating, including boat engines. The component is purchased by OEM (Original Equipment Manufacturers) such as Mercury and Honda, for use in the larger and more powerful outboards. The units sell for $660, and sales volume averages 32,000 units per year. Recently, TwoShaft's major competitor lowered the price of the equivalent part to $590. The market was very competitive, and TwoShaft realized it had to meet the new price or lose significant market share. The controller assembled the following data for the most recent year:  The target cost for maintaining current market share and profitability is (round to nearest cent):
A)$466.61. 
B)$417.12. 
C)$396.61. 
D)$390.61. 
E)$460.61.

Quizplus · Accepted Answer

To maintain the current market share and profitability, TwoShaft needs to reduce its cost to $18,000,800 (32,000 x $590) which is $3,359,200 less than the current cost of $21,360,000. Using the target costing formula: 
Target Cost = Selling Price - Desired Profit
Desired Profit = Selling Price - Target Cost
Desired Profit = $660 - Target Cost
Substituting the values:
$3,359,200 = $660 - Target Cost
Target Cost = $660 - $3,359,200
Target Cost = $396.61
Thus the target cost for maintaining current market share and profitability is $396.61 which is closest to option C $396.61.