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Hera Co is developing a new product using a target costing approach. Market research indicates that to achieve a sales volume of 200,000 units, the selling price should be $23.50.
Hera Co wishes to obtain an average profit margin of 20% on sales.
The following data has been estimated for the product:
Direct material $10.45 per unit
Hourly production volume 20 units
Direct labour cost $64 per hour
Variable overheads $82 per hour (absorbed on a direct labour hour basis)
Fixed costs to produce 200,000 units are estimated to be $680,000.
What reduction in the cost per unit is required to achieve the target cost per unit?
Please can someone help with the breakdown of how to calculate the above question?
To begin with we need to look at target selling price and adjust this by profit margin or mark-up.
200000 x 23.5 = $4.7mn
4.7mn x 0.8 = $3.76mn this is because of twenty per cent margin on sales in this case.
The fixed costs also have to be taken into account as these will have to be covered as well as variable and profit margin.
$3.76mn – $680000 = $3080000
Now the costs of manufacturing have to be worked out. Once this had been done it and divided into units due to be produced, this will give costs per unit. This should be above the target cost. Then all that is required is to find difference between these figures.
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.For answer to above, please see following thread-
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