Question

The expected selling price for a new product is $19.00. Management's goal is to obtain a 20% contribution margin on all sales. If the new product has variable selling and distribution costs of $3.00 per unit, what is the product's target variable manufacturing cost?

A.$12.20
B.$12.80
C.$15.80
D.$18.20

Answer 1

The product's target variable manufacturing cost is calculated by deducting the desired contribution margin and variable selling and distribution costs from the selling price, which results in a target cost of $12.20.

Step-by-step explanation:

The expected selling price for a new product is $19.00. To achieve a 20% contribution margin, the contribution margin in dollars would be 20% of the selling price, equating to $3.80 ($19.00 * 20%). Deducting the variable selling and distribution costs of $3.00 per unit from the contribution margin leaves us with the target variable manufacturing cost. Thus:

Selling Price ($19.00) - Contribution Margin (20% of Selling Price = $3.80) - Variable Selling and Distribution Costs ($3.00) = Target Variable Manufacturing Cost.

Therefore:

$19.00 - $3.80 - $3.00 = $12.20

The product's target variable manufacturing cost is $12.20 per unit, which corresponds to option A.