Final answer:
Target cost is the correct term; it is the minimum cost required to achieve a desired profit when subtracted from the selling price.
Step-by-step explanation:
The correct answer to the student's question is target cost. A target cost is the minimum cost that can be incurred, which, when subtracted from the selling price, allows for a desired profit to be earned. It's a pivotal concept in management accounting and pricing strategies in various businesses. This cost mechanism is essential in developing new products where keeping costs below a certain threshold is critical to meet the market competition or to achieve planned profit margins.
To understand target cost further, let's consider an example. If a company wants to sell a product for $100 and aims to make a $20 profit on each unit, the target cost would be set at $80 per unit.
Other terms also play a significant role in business decision-making. Opportunity cost is the most desirable alternative foregone as a result of making a decision. In contrast, incremental cost refers to the extra cost associated with producing one additional unit of output. However, these terms do not fit the context of the student's question regarding setting a price for profit as target cost directly involves desired profit realization.