PLM's managers are attempting to build a new product, a better mousetrap. They began by determining the features customers wanted and what they would pay for those features. PLM's engineers then reverse-engineered a competitor's product to understand its design and related production processes. Their analysis indicated that customers would pay $10.00 for a better mousetrap. If PLM's required profit margin is 25%, the target cost of a better mousetrap is:
A) $7.50
B) $12.50
C) $2.50
D) None of the above

Question

Quizplus · Accepted Answer

The target cost is calculated by subtracting the desired profit margin from the selling price. If customers would pay $10.00 and the required profit margin is 25%, the profit per unit is 25% of $10.00, which is $2.50. Subtracting this from the selling price ($10.00 - $2.50) gives a target cost of $7.50.

PLM's Managers Are Attempting to Build a New Product, a Better