Question

Target Costing

Laser Impressions, Inc., manufactures color laser printers. Model J20 presently sells for $575 and has a total product cost of $460, as follows:

Direct materials	$330
Direct labor	90
Factory overhead	40
Total	$460

It is estimated that the competitive selling price for color laser printers of this type will drop to $550 next year. Laser Impressions 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 $12 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 $38 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are 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	$

roduct Decisions Under Bottlenecked Operations

Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $188,000 for the company as a whole. In addition, the following information is available about the three products:

	Large		Medium		Small
Unit selling price	$61		$248		$365
Unit variable cost	48		203		321
Unit contribution margin	$ 13		$ 45		$ 44
Autoclave hours per unit	2		6		4
Total process hours per unit	4		12		12
Budgeted units of production	4,100		4,100		4,100

a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production.

	Large	Medium	Small	Total
Units produced
Revenues	$	$	$	$
Variable costs
Contribution margin	$	$	$	$
Fixed costs
Income from operations				$

b. Prepare an analysis showing which product is the most profitable per bottleneck hour. Round the "Unit contribution margin per production bottleneck hour" amounts to the nearest cent.

	Large	Medium	Small
Contribution margin	$	$	$
Autoclave hours per unit
Unit contribution margin per production bottleneck hour	$	$	$

Total Cost Method of Product Pricing

Smart Stream Inc. uses the total cost method of applying the cost-plus approach to product pricing. The costs of producing and selling 7,500 units of cell phones are as follows:

Variable costs:			Fixed costs:
Direct materials	$ 75	per unit	Factory overhead	$283,100
Direct labor	35		Selling and administrative expenses	99,400
Factory overhead	23
Selling and administrative expenses	17
Total variable cost per unit	$150	per unit

Smart Stream desires a profit equal to a 16% return on invested assets of $791,440.

a. Determine the total cost and the total cost amount per unit for the production and sale of 7,500 units of cellular phones. Round the cost per unit to two decimal places.

Total cost	$
Total cost amount per unit	$

b. Determine the total cost markup percentage (rounded to two decimal places) for cellular phones.
%

c. Determine the selling price of cellular phones. Round to the nearest cent.
$ per cellular phone

Answer 1

Question 1
a
	Existing Selling Price	575
	Existing Total Cost A	460
	Earning B	115
	Mark UP B/A	25%
	New Selling Price	550
	New Cost (550/(100+25))	440
	Hence Target Cost	440
b	Required Cost Reduction	460-440	20
c	No
Question 2
a
		Large	Medium	Small	Total
	Unit Produced	4100	4100	4100	12300
	Revenue	250100	1016800	1496500	2763400
	Variable Cost	196800	832300	1316100	2345200
	Contribution Margin	53300	184500	180400	418200
	Fixed Cost				188000
	Income from operations				230200
b
	Contribution Margin A	13	45	44
	Autoclave hours per unit B	2	6	4
	Unit Cont Margin per production bottleneck hour A/B	6.5	7.5	11
	Small is most profitable
Question 3
		Per Unit	Total
a.	Units	7500
	Variable Cost:
	Direct Material	75	562500
	Direct Labor	35	262500
	Factory Overhead	23	172500
	Selling and Administrative	17	127500
	Fixed Cost:
	Factory Overhead		283100
	Selling and Administrative		99400
	Total Cost		1507500
	Total Cost amount per unit 1507500/7500		201
b.
	Return needed 791440*16%	126630
	Total Cost	1507500
	Mark up % 126630/1507500	8.40%
c.
	Total Cost	1507500
	add: Mark UP	126630
	Selling Price for 7500 Units	1634130
	Selling price per unit	217.88