Question

Knox Company has a new product with a projected selling price of $6.00 each. It estimates that it could sell 100,000 units annually. Variable costs are expected to be $2.75. Knox anticipates a profit of $2.50 per unit. The target cost for the product is:_________.

Answer 1

350,000

And if done per unit, $3.50

Step-by-step explanation:

Both sales and variable cost are dependent on the number of units sold.

The sales less the variable cost gives the contribution margin. The contribution margin less the fixed cost gives the net operating income.

The target cost of the product is the difference between the selling price and the anticipated profit.

Target cost per unit

= $6.00 - $2.50

= $3.50

Total Target cost = $3.50 * 100,000

= $350,000