ObjectiveMcq
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Which of the following best describes target costing?
Correct Answer: A — Setting a cost by subtracting a desired profit margin from a competitive market price
Correct Answer: A
Explanation:
Target costing is a market-driven pricing strategy. A company starts with the price customers are willing to pay in a competitive market, then subtracts the desired profit margin to arrive at the maximum allowable (target) cost to produce the product. This is the reverse of cost-plus pricing (option B), which adds a margin to cost to determine price.
Target costing is especially useful in competitive markets where the selling price is largely determined externally, making internal cost management critical to profitability.