Question

Reunion Enterprises is considering a new video streaming device for homes. The analyst has collected some information about the product design summarized as follows.

Prime cost per unit	$	106
Conversion cost per unit		86
Direct material cost per unit		52

The marketing group at Reunion believes this product can be a success if sold at a price of $153.40 per unit. Reunion desires an operating margin (as a percentage of costs) of 30 percent on products of this type.

Required:

a. Will Reunion achieve its target operating margin based on these product characteristics?

b. A product engineer suggests that they are still uncertain about the direct labor costs. By how much would direct labor cost have to fall or by how much could they increase per unit such that the desired operating margin would be met exactly?

Answer 1