How to use the target costing calculator
Target costing inverts the usual sequence. Instead of building up a cost and adding a margin on the end, you start from the price the market will actually pay, subtract the profit the business has to earn, and treat what remains as the allowable cost that design and sourcing must fit inside. In one line: allowable cost = target price − target profit.
Which basis you used for that profit matters more than most people expect. Margin treats the selling price as the base and asks what share of it is profit, so the price is multiplied by one minus the rate. Markup treats cost as the base, so the price is divided by one plus the rate. Enter 30% either way and you get two different allowable costs, which is why the result label restates the exact formula applied.
Entering your current estimated cost produces the gap against allowable cost, labeled as a reduction needed when the current cost sits higher and as headroom when it sits lower. A reduction gap has to be closed by design simplification, part consolidation or process work, or else the target price or profit rate has to move. Add a planned volume and both figures scale into totals.
Frequently asked questions
They divide by different bases. Margin treats the selling price as 100 and asks what share of it is profit; markup treats cost as 100 and asks how much was added on top. At the same stated 30%, a margin basis leaves a lower allowable cost than a markup basis.
This tool defines allowable cost as target price minus target profit, nothing more. Whether you count only materials and conversion, or also freight and channel fees, is a company decision, so enter your current estimated cost on the same basis to keep the comparison honest.
It means the current estimated cost sits above the allowable cost, so design simplification, part consolidation or process improvement has to close that amount. If it cannot be closed, the target price or the target profit rate needs to change instead.