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Hello Sir,
In this example I didnot understand part c that how the cost of $2.2 is calculated I mean what is the logic behind it and also why the manufacturing cost of $6 is reduced to $4.80?
Thank youOK – let me explain in an alternative way from the answer (any approach would be allowed in the exam).
At the moment, the cost per unit it $7.80 (from part (b)) which is above the target cost of $7.
So…..even if we did not spend the extra $20,000 then the cost per unit would have to fall by $0.80 to reach target.
However, spending an extra $20,000 would itself increase the lifecycle cost per unit by $20,000/50000 units = $0.40 per unit.So….we have to reduce the manufacturing cost by $0.80 and by a further $0.40 = $1.20 per unit.
Currently it is $6 per unit, so we have to reduce it to $6 – $1.20 = $4.80 per unit.
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