Question

Required information

Problem 13-38 Target Costing in a Service Firm [LO 13-1]

UR Safe Systems installs home security systems. Two of its systems, the ICU 100 and the ICU 900, have these characteristics:

Design Specifications	ICU 100	ICU 900	Cost Data
Video Camera	1	3	$150 each
Video monitors	1	1	$75/e
Motion detectors	5	8	$15/each
Floodlights	3	7	$8/each
Alarms	1	2	$15/each
Wiring	700ft.	1,100ft.	$0.10/ft
Installation	16hr	26 hr	$20/hr

The ICU 100 sells for $810 installed, and the ICU 900 sells for $1,520 installed.

Part 1

Required:

1. What are the current profit margin percentages on both systems?

2. UR Safe’s management believes that it must drop the price on the ICU 100 to $750 and on the ICU 900 to $1,390 to remain competitive in the market. Recalculate profit margin percentages for both products at these price levels and then compute the target cost needed for each product to maintain the current profit margin percentages.

(For all requirements, round your percentage answers to 2 decimal places and other answers to the nearest whole dollar amount.)

	ICU 100	ICU 900
1. Current Profit Margin	10.00%	10.46
2.Profit Margin	2.80%	2.09%
Target cost	?	?

So I found for step 1:

810-729=81/810=10%

1,520-1,361=59/1,520=10.46%

Step 2:

750-729=21/750=.028=2.8%

1390-1361=29/1390=.020=2.08%

My problem is are those 4 calculations correct? And what would be the target cost?

Answer 1

Q 1. What are the current profit margin percentages on both systems?

Ans : Current profit magin is ICU 100 11.11 % and ICU 900 11.68% How

Product Name ICU 100 ICU 900
      
Cost   729 1361
Price 810 1520
      
Profit 81 159
Profit In % 11.11 % 11.68 %
(= 81/729%)      
(=159 / 1361 % )

Q 2. UR Safe’s management believes that it must drop the price on the ICU 100 to $750 and on the ICU 900 to $1,390 to remain competitive in the market. Recalculate profit margin percentages for both products at these price levels and then compute the target cost needed for each product to maintain the current profit margin percentages.

Ans : If the price was dropped by both the product than new profit margin is 2.88 % and 2.13 %

  

(B) If we price dropped but profit margine are same than require cost will be ICU 100 $ 675 & ICU 900 $ 1245

If we want reduase cost we have to purcchase Vedio camera on the price of Rs 130 /each and installation  Charges will be $ 18/hr after this two correction cost will reduase and margine will be same