Final answer:
The formula for determining target cost is 'revenue - desired profit.' This calculation helps businesses set the maximum allowable cost to reach their desired profit margins. It involves subtracting the desired profit from projected revenues.
Step-by-step explanation:
The correct option for arriving at the target cost of a product or service is a. revenue - desired profit. This formula is used to determine the maximum cost that a company can afford while still achieving its desired profit margin.
For clarification and context, the accounting profit is figured by subtracting explicit costs from total revenues. If we consider a company that wishes to have a certain amount of profit after all the costs are paid, we need to ascertain the cost threshold that allows this profit. This is reflected in the formula for target cost where we subtract the desired profit from the expected revenues. By doing this, we establish the cost limit that enables the attainment of the profit goal.
For example, if a company projects a revenue of $200,000 and desires an accounting profit of $50,000, the target cost is arrived at by subtracting the desired profit from the revenue, resulting in a maximum allowable cost of $150,000. In this sense, the company must manage costs, including both explicit and implicit costs, to not exceed this target cost.