Question

Premo Pens, Inc. is in the process of developing a new pen to replace its existing top-of-line Executive Model. Market research has identified the critical features the pen must have and it is estimated that customers would be willing to pay $30 for a pen with these features. Premo's production manager estimates that it will cost $26 to produce the proposed model. The current Executive Model sells for $24 and has a total production cost of $20. A competitor sells a pen similar to the proposed model, but without Premo's patented easy retract feature, for $28. It is estimated to cost the competitor $25 to produce.
Required:
1. If Premo seeks to earn a 20% return on sales on the new model, which of the following represents the target cost for the new pen?
a. $26.00
b. $22.40
c. $24.00
d. $19.80

Answer 1

Answer:

c. $24.00

Explanation:

The computation of the target cost is shown below:

Target cost = Selling price - (Selling price × profit margin)

where,  

Selling price = $30

And, the profit margin is 20%

So, the target cost is  

= $30 - ($30 × 20%)

= $30 - $6

= $24

Basically, by using the above formula, we can find out the target cost after considering the selling price and the profit margin