Question

Collins Corporation uses target costing and sells a product for $50 per unit. The company seeks a profit margin equal to 40% of sales. If target-costing calculations revealed a need for a $5 cost reduction, the firm's current manufacturing cost must be: A. $20.

B. $25.
C. $30.
D. $35.
E. some other amount.

Answer 1

The Collins Corporation's current manufacturing cost is $35 per unit, as they need a $5 reduction to meet their target profit margin of 40% on a $50 sales price.

Step-by-step explanation:

The student has asked what the Collins Corporation's current manufacturing cost must be if it uses target costing, sells its product for $50 per unit, and seeks a profit margin of 40% of sales, but needs a $5 cost reduction to hit this target.

To find the current manufacturing cost, we first calculate the desired profit per unit by taking 40% of $50, which is $20. This means the target cost to achieve the desired profit margin should be $50 - $20 = $30. Since a $5 cost reduction is needed, the current manufacturing cost must be $30 + $5 = $35.