Mathematics · Cost Accounting & Business Mathematics

Hera Co is developing a new product using a target costing approach. The initial assumption was that a sales volume of 200,000 units could be achieved at a selling price of $25 per unit. However, market research indicates that to achieve a sales volume of 200,000 units, the selling price should be $23.50. Hera Co wishes to obtain an average profit margin of 20% on sales. The following data has been estimated for the product: • Direct material: $10.45 per unit • Hourly production volume: 20 units • Direct labour cost: $64 per hour • Variable overheads: $82 per hour (absorbed on a direct labour hour basis) Fixed costs to produce 200,000 units are estimated to be $680,000. What reduction in the cost per unit is required to achieve the target cost per unit?