Target costing and pricing. Mega Products makes valves for a variety of oil extr

Question

Target costing and pricing. Mega Products makes valves for a variety of oil extraction equipment. Mega Products sells the valves to companies that manufacture and sell pumps. The company’s market research department has discovered a market for valves that is similar in automated manufacturing equipment in another industry. The market research department indicates that they could sell to these new outlets for $250. Assume Mega Products desires an operating profit of 20 percent of sales.

Required:

What is the highest acceptable manufacturing cost for which Mega Products would produce the valves?

Explanation / Answer

Highest acceptable manufacturing cost=Selling price-Operating profits= 250-(250*20%)=$200

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