Discussion
Which of the following denotes a target cost ?
Answer: A
Target cost is Market price - Desired profit margin.
Target costing starts from the price customers are willing to pay, the market or target price, and subtracts the profit the company wants to earn. What is left is the maximum cost at which the product must be designed and produced:
\[ \begin{aligned} &\text{Target cost} \\ &= \text{Market price} - \text{Desired profit} \end{aligned} \]
Options B and C start from a standard selling price set internally rather than from the market, which is the reverse of target costing's logic, and option D subtracts a return on investment instead of the profit margin.
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