BBM Corporation'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. BBM'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 BBM's required profit margin is 25%, the target cost of a better mousetrap is:
A) $2.50
B) $7.50
C) $12.50
D) None of the above

Question

Quizplus · Accepted Answer

To calculate the target cost, we need to use the formula:

Target cost = Selling price - Desired profit margin

The selling price of the better mousetrap is determined to be $10.00, and the desired profit margin is 25% of the selling price, which is $2.50.

Therefore, the target cost of the better mousetrap is:

$10.00 - $2.50 = $7.50

So, the correct answer is B, $7.50.

BBM Corporation's Managers Are Attempting to Build a New Product