Question

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $375 and has a total product cost of $300, as follows:

Direct materials	$220
Direct labor	60
Factory overhead	20
Total	$300

It is estimated that the competitive selling price for color laser printers of this type will drop to $360 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:

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.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $8 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $25 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

a	TARGET COST FOR MODEL J20
	PRESENT		AFTER REDUCTION
	PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
	SALE PRICE	375	SALE PRICE	360
	LESS:PRODUCT COST	300	LESS:MARK UP(SAME MARK UP PERCENT)
	MARK UP	75	(360*20%)	72
	MARK UP PERCENT(75/375*100)	20%	TARGET COST	$        288
b	REQUIRED COST REDUCTION
	PARTICULARS	AMOUNT
	PRESENT PRODUCT COST	300
	AFTER PRODUCT COST	288
	REQUIRED COST REDUCTION	12
C	DIRECT LABOUR REDUCTION
	DIRECT LABOUR RATE	$25 PER HOUR
	ACTUAL LABOUR COST	$                                      60
	TOTAL TIME TAKEN	($60*60 MINUTES)/$25=144 MINUTES
	REDUCTION IN TIME TAKEN	9 MINUTES PER UNIT
	TIME TAKEN NOW	144 MINUTES-9 MINUTES=135 MINUTES
	NEW LABOUR COST	(135 MINUTES*$25)/60 MINUTES=$56.25
	SAVINGS IN DIRECT LABOUR REDUCTION	$60-$56.25=$3.75
	ADDITIONAL INSPECTION
	DIRECT LABOUR RATE	$25 PER HOUR
	ACTUAL LABOUR COST	$                                      60
	TOTAL TIME TAKEN	($60*60 MINUTES)/$25=144 MINUTES
	ADDITION IN TIME TAKEN	6 MINUTES PER UNIT
	TIME TAKEN NOW	144 MINUTES+6 MINUTES=150 MINUTES
	NEW LABOUR COST	(150 MINUTES*$25)/60 MINUTES=$62.50
	REDUCTION IN MATERIAL COST	$8 PER UNIT
	ADDITION IN LABOUR COST	($62.5-$60)=$2.5 PER UNIT
	SAVING IN ADDITIONAL INSPECTION	($8-$2.5)=$5.5
	INJECTION MOULDING PRODUCTIVITY IMPROVEMENT
	CYCLE TIME IMPROVEMENT
	PRESENT	4 MINUTE PER PART
	TARGET	3 MINUTE PER PART
	IMPROVEMENT	1 MINUTE PER PART
	PERCENTAGE OF IMPROVEMENT(1/4*100)	25%
	DIRECT LABOUR(30%)	$60*30%=$18
	IMPROVEMENT IN DIRECT LABOUR COST	$18*25%=$4.5
	FACTORY OH(40%)	$20*40%=$8
	IMPROVEMENT IN DIRECT LABOUR COST	$8*25%=$2
	SAVING	($2+$4.5)=$6.5
	TOTAL SAVINGS	$(3.75+5.5+6.5)	$                                                                       15.75