Edward Co assembles and sells many types of radio. It is considering extending its
product range to include digital radios. These radios produce a better sound quality than
traditional radios and have a large number of potential additional features not possible with
the previous technologies (station scanning, more choice, one touch tuning, station
identification text and song identification text etc).
A radio is produced by assembly workers assembling a variety of components. Production
overheads are currently absorbed into product costs on an assembly labour hour basis.
Edward Co is considering a target costing approach for its new digital radio product.
A selling price of $44 has been set in order to compete with a similar radio on the market
that has comparable features to Edward Co’s intended product. The board have agreed
that the acceptable margin (after allowing for all production costs) should be 20%.
Cost information for the new radio is as follows:
Component 1 (Circuit board) – these are bought in and cost $4·10 each. They are bought
in batches of 4,000 and additional delivery costs are $2,400 per batch.
Component 2 (Wiring) – in an ideal situation 25 cm of wiring is needed for each completed
radio. However, there is some waste involved in the process as wire is occasionally cut to
the wrong length or is damaged in the assembly process. Edward Co estimates that 2% of
the purchased wire is lost in the assembly process. Wire costs $0·50 per metre to buy.
Other material – other materials cost $8·10 per radio.
Assembly labour – these are skilled people who are difficult to recruit and retain. Edward
Co has more staff of this type than needed but is prepared to carry this extra cost in return
for the security it gives the business. It takes 30 minutes to assemble a radio and the
assembly workers are paid $12·60 per hour. It is estimated that 10% of hours paid to the
assembly workers is for idle time.
Production Overheads – recent historic cost analysis has revealed the following production
overhead data:
Total production overhead $
Month 1
620,000
Month 2
700,000
Total assembly labour hours
Month 1
19,000
Month 2
23,000
Fixed production overheads are absorbed on an assembly hour basis based on normal
annual activity levels. In a typical year 240,000 assembly hours will be worked by Edward
Co.
Required:
(d)
Calculate the expected cost per unit for the radio and identify any cost gap that
might exist.
(13 marks
Sir i dont understand to calculate the cost of component 1 and the fixed and variable OH
eg like 1 batch is $2400 and each batch has 4000 components i am understanding it as 4000/2400 which is wrong please help
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