Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new product with the following estimates: Estimated market price $ 2,700 Annual demand Life cycle Target profit 97,000 units 7 years 30% return on sales Required: 1. Compute the target cost of this product. 2. Compute the target cost if Majesty wants a 37 percent return on sales. 3. Compute the target cost if Majesty wants a 11 percent return on sales.
Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new product with the following estimates: Estimated market price $ 2,700 Annual demand Life cycle Target profit 97,000 units 7 years 30% return on sales Required: 1. Compute the target cost of this product. 2. Compute the target cost if Majesty wants a 37 percent return on sales. 3. Compute the target cost if Majesty wants a 11 percent return on sales.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new
product with the following estimates:
Estimated market price
2$
2,700
Annual demand
97,000 units
Life cycle
Target profit
7 years
30% return on sales
Required:
1. Compute the target cost of this product.
2. Compute the target cost if Majesty wants a 37 percent return on sales.
3. Compute the target cost if Majesty wants a 11 percent return on sales.
Expert Solution
Step 1
Formula:
Target cost = Estimated market price - Gross margin.
Deduction of Gross margin from estimated market price derives the target cost.
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