Answer the following questions using the information below:
After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales.
-What is the target cost?
A)$1,800,000
B)$1,920,000
C)$2,520,000
D)$2,016,000

Question

Quizplus · Accepted Answer

The target operating income is 20% of sales and the target sales volume for interior doors is 20,000 at a target price of $120 each.

Thus, the total target operating income is:

$120 x 20,000 x 0.20 = $480,000

The target cost can be calculated as follows:

Target Cost = Target Price - Target Operating Income per unit

Target Operating Income per unit = Target Operating Income / Target Sales Volume

Target Operating Income per unit = $480,000 / 20,000

Target Operating Income per unit = $24

Target Cost = $120 - $24

Target Cost = $96

The total target cost is:

$96 x 20,000 = $1,920,000

Therefore, the answer is B) $1,920,000. This is the best choice as it satisfies the criteria given in the question.

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