Which equation better describes target costing?
A) Selling Price - Desired Profit = Target Costs
B) Selling Price - Target Variable Costs = Profit
C) Target Variable Costs + Net operating income = Selling Price
D) Target Variable Costs + Target Fixed Costs + Contribution margin = Selling Price

Question

Quizplus · Accepted Answer

Target costing is a strategic approach that determines the maximum cost that a company can incur for producing and selling a product, based on the selling price and desired profit margin. Therefore, the equation A (Selling Price - Desired Profit = Target Costs) best describes target costing as it reflects the calculation of the cost needed to achieve a specific profit margin. Option B refers to cost-plus pricing, option C is the formula for calculating the contribution margin, and option D is the equation for calculating the break-even point.

Which Equation Better Describes Target Costing