Question

Target Costing Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $650 and has a total product cost of $520, as follows: Direct materials Direct labor $370 100 Factory overhead 50 Total $520 It is estimated that the competitive selling price for color laser printers of this type will drop to $620 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas: 1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit. 2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $13 per unit. 3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines. The direct labor rate is $42 per hour. a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places. b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places. c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places. 1. Direct labor reduction 2. Additional inspection 3. Injection molding productivity improvement Total savings

Answer 1

Step 1:-

Calculating Markup on Historical Cost

= Profit/ Total Cost x 100

= (650-520)/520 x 100

= 130/520 x 100

= 25 % on cost

.

Step 2.

Statement showing Target cost and required cost reduction per unit.

Particulars	Calculations	Per Unit ($)
Target Selling Price		620.00
Less Target Profit (25% on Cost)	[25/(100+25) x 620]	124.00
Target cost		496.00
Cost Reduction Required	(520 - 496)	24.00

.

Answer c.

Statement showing Cost reduction achieved Per unit as per engineers recommendations.

Particulars	Calculations	Per Unit ($)	Per Unit ($)
1. Direct Labor reduction	( $42 per Hour / 60 min x 9 Min.)		6.30
2. Additional inspection
a. Reduction In material cost		13.00
b. Cost of inspection (Labor)	( $42 per Hour / 60 min x 6 Min.)	-4.20	8.80
3. Injection molding productivity improvement	[$100 x 30% x (4 min - 3 Min) /4 Min]		7.50
	Total Savings		22.60

.

As per above calculations, the required cost reduction of $24 per unit cannot be achieved as the total savings is only $22.60 per unit.

Note :- It is assumed that Total fixed over heads will remain unchanged. Hence ignored in our solution.