Question

Management accounting information helps managers calculate a target cost for a product ________.

A) by subtracting from the target price the operating income per unit of product that the company wants to earn
B) by subtracting from the target price the net income per unit of product that the company wants to earn
C) by subtracting profit margin per unit from the target price of product that the company wants to earn
D) by adding the operating income per unit and the contribution margin per unit

Answer 1

Management accounting helps calculate a product's target cost by subtracting the desired operating income per unit from the market-based target price. Unlike average or marginal costs, target cost incorporates the company's desired profit margin directly into pricing strategy.

Step-by-step explanation:

Management accounting information aids managers in calculating a target cost for a product by subtracting from the target price the operating income per unit of product that the company wants to earn. When setting a target cost, they consider what price the market will bear for a product and then decide how much profit per unit is desired. The target cost is then computed by taking the desired sale price and subtracting the desired profit margin.

This is different from simply calculating average or marginal costs. Average cost is the total cost divided by the quantity of output produced (AC = TC/Q), and marginal cost is the change in total cost divided by the change in output (MC = ΔTC/ΔQ). While these cost measures provide valuable insights, they're not specifically used to set a target cost based on market price and desired profit.