Target Costing

Cam Co manufactures webcams, devices which can provide live video and audio streams via personal computers. It
has recently been suffering from liquidity problems and hopes that these will be eased by the launch of its new
webcam, which has revolutionary audio sound and visual quality. The webcam is expected to have a product life cycle
of two years. Market research has already been carried out to establish a target selling price and projected lifetime
sales volumes for the product. Cost estimates have also been prepared, based on the current proposed product
specification. Cam Co uses life cycle costing to work out the target costs for its products, believing it to be more
accurate to use an average cost across the whole lifetime of a product, rather than potentially different costs for
different years. You are provided with the following relevant information for the webcam:

Projected lifetime sales volume 50,000 units
Target selling price per unit $200
Target profit margin (35% selling price) $70
Target cost per unit $130
Estimated lifetime cost per unit (see note below for detailed breakdown) $160
Note: Estimated lifetime cost per unit:160

$ $/unit
Manufacturing costs
Direct material (bought in parts) 40
Direct labour 26
Machine costs 21
Quality control costs 10
Rework costs 3

Non-manufacturing costs
Product development costs 25
Marketing costs 35

Estimated lifetime cost per unit 160

The average market price for a webcam is currently $150.
The company needs to close the cost gap of $30 between the target cost and the estimated lifetime cost. The following
information has been identified as relevant:

1. Direct material cost: all of the parts currently proposed for the webcam are bespoke parts. However, most of these
can actually be replaced with standard parts costing 55% less. However, three of the bespoke parts, which
currently account for 20% of the estimated direct material cost, cannot be replaced, although an alternative
supplier charging 10% less has been sourced for these parts.

2. Direct labour cost: the webcam uses 45 minutes of direct labour, which costs $34·67 per hour. The use of more
standard parts, however, will mean that whilst the first unit would still be expected to take 45 minutes, there will
now be an expected rate of learning of 90% (where ‘b’ = –0·152). This will end after the first 100 units have
been completed.

3.Rework cost: this is the average rework cost per webcam and is based on an estimate of 15% of webcams
requiring rework at a cost of $20 per rework. With the use of more standard parts, the rate of reworks will fall to
10% and the cost of each rework will fall to $18.

Dear Sir.
Can u tell me Answer for Rework cost only please ?