Calculating Target Cost [LO 4-8] 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 $ 1,200
Annual demand 100,000 units
Life cycle 5 years
Target profit 30 % return on sales
Required :
1. Compute the target cost of this product.
target cost ?

Compute the target cost if Majesty wants a 40 percent return on sales.

target cost ?

3.
Compute the target cost if Majesty wants a 15 percent return on sales.

target cost ?

A) $840

B) $720

C) $1,020

Explanation:

Part 1) To compute the target cost of the product

First the estimated market price for the product is $1,200 and the Gross margin is 30%

Therefore, target cost is a work back based on the known %

Gross Margin = 0.3 x $1,200 = $360

Target Cost = $1,200 - $360 = $840

Part 2) Compute the target cost if Majesty wants a 40 percent return on sales

Also, the Estimated market price is still $1,200 and the return on sales is 40%

Gross Margin = $1,200 x 04 = $480

The target cost = $1,200 - $480= $720

Part 3) Compute the target cost if Majesty wants a 15 percent return on sales

Again, Estimated Market Price is $1,200 and Return on sales is 15%

Gross margin = $1,200 x 0..15 = $180

Target Cost = $1,200 - $180= $1,020