Majesty Company uses target costing to ensure that its products are profitable.

Question

Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new product with the following estimates: Estimated market price Annual demand Life cycle Target profit $1,100 85,000 units 5 years 30% retum on sales Required: 1. Compute the target cost of this product. Target Cost 2. Compute the target cost if Majesty wants a 35 percent return on sales. Target Cost 3. Compute the target cost if Majesty wants a 5 percent return on sales Target Cost

Explanation / Answer

1.

Target sales revenues = 85,000 units * $1,100 per unit

= $93,500,000

Target operating income = $93,500,000 * 30%

= $28,050,000

Target operating income per unit = $28,050,000 / 85,000 units

= $330

Target cost per unit = Market price per unit - Target operating income per unit

= $1,100 - $330

= $770

2.

Target sales revenues = 85,000 units * $1,100 per unit

= $93,500,000

Target operating income = $93,500,000 * 35%

= $32,725,000

Target operating income per unit = $32,725,000 / 85,000 units

= $385

Target cost per unit = Market price per unit - Target operating income per unit

= $1,100 - $385

= $715

3.

Target sales revenues = 85,000 units * $1,100 per unit

= $93,500,000

Target operating income = $93,500,000 * 5%

= $4,675,000

Target operating income per unit = $4,675,000 / 85,000 units

= $55

Target cost per unit = Market price per unit - Target operating income per unit

= $1,100 - $55

= $1,045

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