Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer's current full cost for the product is $44 per unit.
-Which of the following equations best describes target costing?
A)Selling Price - Desired Profit = Target Cost
B)Selling Price + Profit = Target Cost
C)Target Variable Cost + Contribution Margin = Selling Price
D)Selling Price = Profit - Target Variable Cost

Question

Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer management desires a 12.5% profit margin on sales. Flyer's current full cost for the product is $44 per unit.​
-Which of the following equations best describes target costing?
A)Selling Price - Desired Profit = Target Cost
B)Selling Price + Profit = Target Cost
C)Target Variable Cost + Contribution Margin = Selling Price
D)Selling Price = Profit - Target Variable Cost

Quizplus · Accepted Answer

Target costing is a pricing method used to determine the allowable amount for the cost of a product, so that a company can earn its desired profit margin. The formula for target costing is: Selling Price - Desired Profit = Target Cost. This formula helps a company to work backwards from the selling price, subtracting the desired profit to find out how much the product should cost to produce.

Flyer Company Sells a Product in a Competitive Marketplace