Madrid Manufacturing is considering the manufacture of a new product. Madrid was hoping to sell the product for $504 per unit and estimated the total cost per unit to be $360. Madrid conducted market research and found out that the market is only willing to pay $462 for the new product. Using the target costing approach, how much will Madrid have to reduce the production cost in order to achieve the same amount of gross profit as originally planned?

Question

Quizplus · Accepted Answer

Madrid originally planned for a gross profit of $144 per unit ($504 - $360). With the market willing to pay $462, to maintain the same gross profit, the production cost must be reduced to $318 ($462 - $144). Therefore, the reduction needed is $42 ($360 - $318).

Madrid Manufacturing Is Considering the Manufacture of a New Product