Question

Whitenall Corporation produces and sells teeth whitening products. The company has created and patented a formula for a new whitener. The CEO wants to make sure the product is priced competitively. The company anticipates that it will sell 400,000 units of the product in the first year with the following estimated costs:

Product design and licensing	$1,700,000
Direct materials	4,000,000
Direct manufacturing labor	1,600,000
Variable manufacturing overhead	400,000
Fixed manufacturing overhead	2,500,000
Fixed marketing	3,000,000

Required:

1. The company believes that it can successfully sell the product for $45 a bottle. The company’s target operating income is 30% of revenue. Calculate the target full cost of producing the 400,000 units. Does the cost estimate meet the company’s requirements?

Group of answer choices

$33 per bottle, No doesn't meet target

$28.75 Yes does meet target

$35 per bottle, Yes does meet target

$15 per bottle, Yes does meet target

2. A component of the direct materials cost requires a very expensive bleaching agent. If the company could eliminate this one ingredient, the materials cost would decrease by 25%. However, this would require design changes of $300,000 to engineer a chemical equivalent of the ingredient. Will this design change allow the product to meet its target cost?

Group of answer choices

$30.50, Yes does meet target

$31.25 per bottle, No does not meet target

$33 per bottle. No does not meet target

$31.25 per bottle, Yes does meet target

3. The CEO does not believe that the formula should be altered for fear it will tarnish the company’s brand. She prefers that the company become more efficient in manufacturing the product. If fixed manufacturing costs can be reduced by $250,000 and variable direct manufacturing labor costs are reduced by $1 per unit, will Whitenall achieve its target cost?

Group of answer choices

$32.38 per bottle, Yes does meet target

$31.38 per bottle, Yes meets target

$33 per bottle, No does not meet target

$32.38 per bottle, No does not meet target

Answer 1

1) Option 1 $ 33 per bottle ,No does'nt meet target

2) Option 4 $31.25 ,Yes does meet target

3) Option 2 $ 31.38 , Yes meets Target

Explaination

Target costing is a cost accounting approach in which companies set targets for costs based on the price prevalent in the market and the profit margin they want to earn.

Full cost is the total cost incurred in production . It is end to end cost of procuding Product and services

1) Target Revenue = $45× 400000= $18000000

Less Target Profit 30% of Revenue= $ 5400000

Target Cost = $12600000

Target cost per unit =$1260000÷ 400000= $31.5 per unit

Total Full cost

Product design and licencing	$1700000
Direct manufacturing cost	$4000000
Direct labour	$1600000
Variable manufacturing overhead	$400000
Fixed manufacturing overhead	$2500000
Fixed marketing	$3000000
Total cost	$13200000

Full cost per unit = $13200000÷400000= $33 which is over the target cost of $31.5 hence not meet the target

2)

Total Full cost (Working 1 above)	$13200000
Less Reductiom in material cost ($4000000×25%)	$1000000
Add : Increase in Designing cost	$300000
Revised cost	$12500000

Revised cost per unit =$12500000/400000=$31.25 which is below target cost ie $31.50 hence meet the target

3)

Full cost ( from working 1)	$13200000
Less :Reduction in Fixed manufacturing cost	$250000
Less : Reduction in variable direct Labour $1×400000	$400000
Revised full cost	$12550000

Full cost per unit = $12550000÷400000= $31.375 or $31.38 which is below target cost of $31.5, hence meet the target