Example 2 XYZ assembles and sells electronic toys . It is considering extending its product range to include digital toys which offer a variety of features that are not found in its current offering A digital toy is produced by assembly workers assembling a variety of components . Production overheads are currently absorbed on an assembly labour hour basis XYZ is considering using a target costing approach for its new digital toy A selling price of RM40 per unit of the digital toy has been set by the management , in order to compete with a similar product that is in the market . The management has also set the acceptable profit as 20 % of the selling price Cost information for the digital toy is estimated to be as follows : Component X - these are bought in at RM5 each . Each digital toy requires 2 units of Component X . Component Y - Component Y costs RM7 per digital toy. Assembly labour - the assembly workers are paid RM12.60 per hour . It takes 30 minutes to assemble one unit of the digital toy. Production overheads - recent cost analysis has revealed the following production overheads data : Total production overheads Total assembly labour (RM hour Month 1 234,000 9,000 Month 2 274,000 13,000 Fixed production overheads are absorbed on an assembly labour hour basis , on a normal monthly activity level of 12,000 assembly labour hours Required : (a) Compute the target cost . (b) Compute the estimated production cost per unit of a digital toy and identify any cost gap that might exist