ExpertEasy2 marksMultiple Choice
ACCA · Question 18 · Cost accounting techniques
A tech company is developing a new smartwatch. The competitive market price is expected to be $250. The company requires a profit margin of 20% on the selling price. The current estimated cost to manufacture the watch is $215.
What is the target cost gap?
A tech company is developing a new smartwatch. The competitive market price is expected to be $250. The company requires a profit margin of 20% on the selling price. The current estimated cost to manufacture the watch is $215.
What is the target cost gap?
Answer options:
A.
$15
B.
$35
C.
$50
D.
$0
How to approach this question
Calculate target cost: Selling Price - Required Profit. Then calculate the gap: Estimated Cost - Target Cost.
Full Answer
A.$15✓ Correct
Required profit = 20% of $250 = $50.
Target cost = $250 - $50 = $200.
Estimated cost = $215.
Cost gap = $215 - $200 = $15. The company needs to find ways to reduce costs by $15.
Common mistakes
Calculating a 20% mark-up on cost instead of a 20% margin on sales.
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