Question

Target Costing

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $500 and has a total product cost of $400, as follows:

Direct materials	$290
Direct labor	80
Factory overhead	30
Total	$400

It is estimated that the competitive selling price for color laser printers of this type will drop to $480 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 $10 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 42% of the factory overhead are related to running injection molding machines.

The direct labor rate is $34 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	$

Answer 1

Part 1:
Historical mark up
Sale price	500
Less: Cost of Model J20	400
Profit	100
Mark up percentage on sale price (100 x 100/500)	20
Expected sale price of J Model in next year	480
Less: Mark up (480 x 20%)	96
Target cost of Model J20	384
Part 2:
Current cost of Model J 20	400
Less: target cost to maintain the historical mark up	384
Required cost reduction	16

Part 3:

Direct labour reduction	7.700060716
Additional inspection (56 x 6/98.82)	-3.400121433
Inspection moulding	13.15
	17.44993928

Working note:

Reduction in direct labour hour
9 minutes	9 Minutes
Increase in direct labour hour	6 Minutes
Saving	3 Minutes
Direct labour cost due to moulding change
(80 x 30%) x ¼	24	6
Factory overhead
(30 x 42%) x ¼	12.6	3.15
Direct labour hour except moulding
Direct labour costs (80-24)	56
	Hour	Minutes
Direct labour hour required earlier	1.647058824	98.82353
Direct labour costs reduction for 3 minutes reduction (56 x 3/98.82)	1.700060716