ExpertMedium2 marksMultiple Choice
ACCA · Question 17 · C. Cost accounting techniques
A ride-sharing app is developing a new premium tier service. Market research indicates customers are willing to pay $20 per ride. The company requires a profit margin of 20% on the selling price.
The current estimated cost to provide this premium ride is $18.50.
What is the target cost gap?
A ride-sharing app is developing a new premium tier service. Market research indicates customers are willing to pay $20 per ride. The company requires a profit margin of 20% on the selling price.
The current estimated cost to provide this premium ride is $18.50.
What is the target cost gap?
Answer options:
A.
$1.50
B.
$2.50
C.
$4.00
D.
$16.00
How to approach this question
1. Calculate required profit (20% of selling price). 2. Calculate target cost (Selling price - Required profit). 3. Calculate cost gap (Estimated cost - Target cost).
Full Answer
B.$2.50✓ Correct
1. Required profit = 20% of $20 = $4.00.
2. Target cost = Selling price - Required profit = $20.00 - $4.00 = $16.00.
3. Cost gap = Current estimated cost - Target cost = $18.50 - $16.00 = $2.50.
Common mistakes
Calculating the margin on cost instead of selling price, or confusing the target cost ($16) with the cost gap.
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