Question

Target Costing Oregon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 5,000 log-splitting machines per year at a retail price of $600 each. An independent catalog company would handle sales for an annual fee of $2,000 plus $60 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $110 per unit. If company management desires a return equal to 10 percent of the final selling price, what is the target conversion and administrative cost per unit? Round answer to the nearest cent. $

Answer 1

Target cost is computed as follows:

Target cost = Expected selling price – Target profit

Details	Amount	Amount
Sales		$        3,000,000
Less: Profit @10%		$          -300,000
Target cost		$        2,700,000
Less: Cost of raw material	$       550,000
Sales handling cost [2000+ (60*5000)]	$       302,000	$            852,000
Target conversion and administrative cost		$        1,848,000

Target conversion and administrative cost per unit = $1,848,000 / 5,000

                                                                                         = $369.60

Therefore, target conversion and administrative cost per unit is $369.60.