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	$	1,100
Annual demand		88,000	units
Life cycle		6	years
Target profit		22	% return on sales

Required:
1. Compute the target cost of this product.



2. Compute the target cost if Majesty wants a 41 percent return on sales.



3. Compute the target cost if Majesty wants a 13 percent return on sales.

Answer 1

Ans. 1	Target cost = Estimated market price - (Estimated market price * Return on sales)
	$1,100 - ($1,100 * 22%)
	$1,100 - $242
	$858
Ans. 2	Target cost = Estimated market price - (Estimated market price * Return on sales)
	$1,100 - ($1,100 * 41%)
	$1,100 - $451
	$649
Ans. 3	Target cost = Estimated market price - (Estimated market price * Return on sales)
	$1,100 - ($1,100 * 13%)
	$1,100 - $143
	$957