Question

1. Target Costing

   Laser Impressions, Inc., manufactures color laser printers. Model J20 presently sells for $375 and has a total product cost of $300, as follows:

   Direct materials	$220
   Direct labor	60
   Factory overhead	20
   Total	$300

   It is estimated that the competitive selling price for color laser printers of this type will drop to $360 next year. Laser Impressions has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

   1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.
   2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $8 per unit.
   3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines.

   The direct labor rate is $25 per hour.

   a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places.
   $

   b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
   $

   c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

   1. Direct labor reduction	$
   2. Additional inspection	$
   3. Injection molding productivity improvement	$
   Total savings	$

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Answer 1

Answer a:

Present sale price of Model J20 = $375.00

Present product cost of Model J20 = $300.00

Hence Mark up on selling price = (375 - 300) / 375 = 20%

Now estimated competitive selling price for color laser printers of this type next year = $360.00

Hence, Target get for next year = 360.00 * (1 - 20%) = $288.00

Target cost for Model J20 = $288.00

Answer b:

Required cost reduction = Present product cost of Model J20 - Target cost for Model J20 = 300 - 288 = $12.00

Required cost reduction per unit = $12.00

Answer c:

Required cost reduction per unit = $12.00. We find from above evaluation that the three engineering improvements together saves $16 per unit. Hence the required cost reduction (drift) can be achieved with the three engineering improvements together.

Workings:

1. Direct labor reduction:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

The direct labor rate is $25 per hour.

Direct labor reduction = 25 * 9/ 60 = $3.75

2. Additional inspection:

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $8 per unit.

Net Cost Reduction per unit = $8 - 25 * 6 / 60

= $5.50

3. Injection molding productivity improvement:

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines.

Cost reduction = (30% * 60 + 45% * 20) * 1 / 4 = $6.75