Costing correctly is an essential feed into correct pricing, which in turn is a critical factor for survival in a business environment characterized by cut cut-throat competition.

a. Explain the terms target cost and target cost gap.

b. You intend to introduce a new food product which you can only charge $50 per unit, otherwise customers switch to competitors. You want a profit margin of 10% on the selling price. What should be the target cost per unit of the product?

b. Suppose your company is planning to introduce a product on the market. The company estimates the production cost of the product at $135 per unit, and the product can only be sold for a maximum price of $150 per unit, otherwise customers switch to competitors. Your company wants a profit margin of 15%. What is the cost gap on the product and the amount by which should be adjusted to achieve the desired target cost per unit on the product?