target costong

Triple 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.
The marketing director has suggested that $90.00 would be a suitable selling price for the music
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.
(10 marks)
(b) Assume now that the production director has estimated the cost of manufacturing the music
player (using the recently-developed design) at $60,00 per unit and has suggested that the
company should accept a reduced ROI if necessary. Calculate the ROI if this suggestion is
accepted and comment on the production director’s suggestion. (7 marks)
(c) It is often stated that target costing is most likely to be effective when products are still at
the design stage (i.e., before any production begins) and when comprehensive information
about cost driver rates is available from the company’s accounting system. Explain why this is
so. (8 marks)