Financial Performance Target costing/ production question

Hi Toby82,

I recently passed my FP exam but did find this question tough whilst doing it. Anyway will try my best if not there are other experts here who can help you.

Req. profit margin is 30%, so basically easiest way to find 1) the target total production cost per unit for sale price of £40 is £40-30% gives you £28 or the book way is £40 x 70/100 which still gives you £28 as you have to achieve the profit margin of 30%. Same goes with £ 50-30-% gives you target total production cost per unit of £ 35 or you can use book methods whichever way you are comfortable with.

Now well you know that variable production cost for 500,000 units (£40 per unit) is £12, therefore target fixed production cost per unit is total prod. Cost less var. cost £28-£12=£16 and variable cost per 430,000 units (£50 per unit) is £13, therefore £35-£13=. £22.

Now that we know the fixed cost per unit of both the target fixed production cost we can find the total target fixed production for both. Therefore target fixed production cost for sale price £40 is £16 x 500000 units gives £8000,000. (8million) and target fixed production cost for sale price £50 is £22 x 430,000 unit gives £9,460,000 (9.6 million).

Alpha should set price at £50 inorder to achieve the target profit margin. Hop this helps