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riple E Ltd. manufactures a range of electronics products. Technical staff recently developed a design for a new type of in-car music player which can be used to play DVDs, digital downloads, and cassette tapes. The board of the company has asked the marketing, financial, and production directors to evaluate the design before a decision is made as to whether to begin production of the music player.
Themarketingdirectorhassuggestedthat$90.00wouldbeasuitablesellingpriceforthemusic player and that 600 units per annum would be sold at this price. Variable selling costs would amount to $10 per unit sold.
The financial director has estimated that the new capital equipment required in order to manufacture the music player would cost $300 000. The company requires an annual return on investment (ROI) of 8% on all capital investments.
The production director has not yet finalized her estimate of the cost of manufacturing the music player.
However she has commented that the design has certain features which are likely to add to the complexity and cost of the manufacturing process without significantly enhancing the attractiveness of the product to potential customers.
REQUIRED:
(a) Using the data provided above, calculate the target cost of manufacturing the music player, and explain fully the significance of this figure.