Question

1. Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows:

∙     Sixteen times each year, a new card design will be put into production. Each new

      design will require $600 in setup costs.

∙     The parchment grade card product line incurred $75,000 in development costs and

      is expected to be produced over the next four years.

∙     Direct costs of producing the designs average $0.50 each.

∙     Indirect manufacturing costs are estimated at $50,000 per year.

∙     Customer service expenses average $0.10 per card.

∙     Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.

∙     Sales units equal production units each year.

Required:

a.   What are the estimated life-cycle revenues?

b.   What is the estimated life-cycle operating income for the first year?

c.   What is the estimated life-cycle operating income per year for the years after the first year?

d.   What is the total estimated life-cycle operating income?

e. Why is it important for Grace Greeting Cards Incorporated considering using life-cycle budgeting and costing?

2.   Dhahran Corporation manufactures fishing poles that have a price of $42.00. It has costs of $32.64 A competitor is introducing a new fishing pole that will sell for $36.00. Management believes it must lower the price to $36.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. Dhahran Corporation's sales are currently 200,000 poles per year.

Required:

a.   What is the target cost for the new price if target operating income is 20% of sales?

b.   What is the change in operating income for the year if $36.00 is the new price and costs remain the same?

c.   What is the target cost per unit if the selling price is reduced to $36.00 and the company wants to maintain its same income level?

d. Discuss the limitations of target costing and target pricing.

Answer 1

1)

a) estimateed life cycle revenue.

ans ) total sales units * sale value per unit

= (2500 *16) units * $3.50 =$ 140000

b) estimated life cycle operating income for the first year.

ans )  

pariculars	amount $
total sales revenue	140000
design cost $600*16	9600
development cost	75000
direct cost of producing each design 16 designs * $0.50	8
indirect manufacturing cost	50000
customer service expenses per card 2500*16*0.10	4000
operating revenue	1392

c) design cost of $600 will incurre only for first year . therefore total design cost of $9600 will be added to operating income from next three years .

2nd , 3rd ,4th year operating income will be ($9600+$1392) 10992 respectively

d) total operating income for four years will be $1392+($10992*4) = $45360

e)importance of life cycle budgeting .

(i) Over capacity in the industry.

(ii) The company can continue to offer the product to our loyal customers at a reduced price.

(iii) Few competitors produce basic version of our product.

(iv) Product features may be improved or enhanced to differentiate our product from that of the competitors.

(v) Attracting customers by raising awareness about our product through promotion activities.

(vi) High volume of business and increase in competition.