Detailed Answer
Answer (A) is correct.
Target costing begins with a target price, which is the expected market
price given the company’s knowledge of its customers and competitors.
Subtracting the unit target profit margin determines the long-term target
cost. If this cost is lower than the full cost, the company may need to
adopt comprehensive cost-cutting measures. For example, in the
furniture industry, certain price points are popular with buyers: a couch
might sell better at $400 than at $200 because consumers question the
quality of a $200 couch and thus will not buy the lower-priced item. The result is that furniture manufacturers view $400 as the target price of a
couch, and the cost must be lower.
