Question

Target Costing

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $525 and has a total product cost of $420, as follows:

Direct materials	$300
Direct labor	80
Factory overhead	40
Total	$420

It is estimated that the competitive selling price for color laser printers of this type will drop to $500 next year. Laser Cast 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 $11 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 42% of the factory overhead are related to running injection molding machines.

The direct labor rate is $34 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price is 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	$

Answer 1

Answer:-

Solution a:

Existing product cost = $420 per unit

Existing selling price = $525 per unit

Markup on product cost = ($525 - $420) /$420 = 25%

Now price of model J20 for next year = $500

Target cost to maintain markup of 25% = $500 / 125% = $400

Solution b:

Required cost reduction = Existing cost - Target cost = $420 - $400= $20 per unit

Solution c:

1. Saving due to direct labor reduction per unit = $34*9/60 = $5.10 per unit

2. Saving due to additional inspection = $11 - $34*6/60 = $7.6 per unit

3. Injection molding productivity improvement = ($80*30%)* 1/4 + ($40*42%) * 1/4 = $10.2 per unit

Total savings per unit = $5.10 + $7.6+ $10.2 = $22.9

Therefore required cost reduction can be acheived as required reduction is $20 per unit.

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