Question

Brief Exercise 8-1 Your answer is incorrect. Try again. Ortega Company manufactures computer hard drives. The market for hard drives is very competitive. The current market price for a computer hard drive is $53. Ortega would like a profit of $15 per drive. What target cost Ortega should set to accomplish this objective?

Answer 1

Answer:

$38.

Explanation:

Management perform Cost, Volume, and Profit (CVP) analysis to calculate break-even points, set target costs, and to set target profits. It helps them in formulating strategies effectively, reducing costs to generate maximum profit, and to utilize resources efficiently.

As we know that profit is the difference between sales and costs. So, the target cost can easily be calculated by re-arranging the profit equation which is given below;

Profit = Sales - Total Cost

⇒ Total / Target Cost = Sales - Profit

Simply put the figures in the above equation and it gives you;

Target cost = 53 - 15 = $38 OR 72% (38 / 53).

Note: It is more appropriate to state target profit on percentage basis. Here the percentage of target cost is 72%.