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3 Cam Co manufactures 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:
$ $
Manufacturing costs
Direct material (bought in parts) 40
Direct labour 26
Machine costs 21
Quality control costs 10
Rework costs 3 –––
100
Non-manufacturing costs
Product development costs 25
Marketing costs 35
–––
60 ––––
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.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.
Required:
(a) Recalculate the estimated lifetime cost per unit for the webcam after taking into account points 1 to 3 above.Dear sir , could you explain me how to calculate direct material and rework cost ? i didnot understand
Working 1: Direct material cost
Parts to be replaced by standard parts = $40 x 0·8 = $32.
New cost of those at 45% (100% – 55%) = $14·40.
Unique irreplaceable parts: original cost = $40 x 20% = $8.
New cost $7·20
Revised direct material cost = $14·40 + $7·20 = $21·60Thank you in advance Sir
For the material cost, the question says that for 20% of the parts (i.e. 20% x 40 = 8) they cannot be replaced by others, but that they can be nought from a supplier charging 10% less. So these will cost 8 – (10% x 8) = 7.20.
However that is only 20% of the parts, the rest (i.e. 80%) can be replaced with standard parts which cost 55% less. So instead of paying 80% x 40 = 32, then will pay 32 – (55% x 32) = 14.40
So the new total cost is 7.20 + 14.40 = 21.60With regard to reworks, at the moment the average cost is 15% x $20 = $3. (or if you prefer, for every 100 units, 15 will need rework and cost is total 15 x $20 = 300. So if this is the cost for 100, then per unit is 300/100 = $3).
In future, only 10% will need rework and since cost is $18, the cost per unit falls to 10% x $18 = $1.80.
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