Question

Target Costing Laser Cast, Inc., manufactures color laser printers.. Model 320 presently sells for $275 and has a total product cost of $220, as follows: Direct materials $160 Direct labor 40 Factory overhead 20 Total $220 It is estimated that the competitive selling price for color laser printers of this type will drop to $260 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 $6 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 40 % of the factory overhead are related to running injection molding machines. The direct labor rate is $17 per hour. a. Determine the target cost for Model 120 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

Answer 1

a	Existing product cost=	$220 per unit
	Existing selling price=	$275 per unit
	Markup on production cost=	(($275-$220)/220)*100= 25%
	Next year price of model J 20=	$260
	Target cost to maintain markup of 25% =	$260/125%= $208
b	Cost reduction=	Existing cost-target cost
		$220-$208= $12
c
1	Direct labor reduction
	$17*9/60= $2.55 per unit
2	Additional Inspection
	$6-$17*6/60= $4.3 per unit
3	Injection molding productivity improvement
	($40*30%)*1/4 + ($20*40%)*1/4 = $5 per unit
	Total saving = $2.55+$4.3+$5 = $11.85
	Required cost reduction can be achieved as Deduction is $12 per unit

a	Differential Analysis
	Sell rough cut(alt-1) or process further into finished cut(Alt.2)
	Mar-15
		Sell rough-cut (1)	Process further into finished cut (2)	Differential income on income (3)
		(Alternative 1)	(Alternative 2)	(Alternative 2)
	Revenues, per unit (A)	$546	$760	$214
	Costs, per unit (B)	$394	$528	($134)
	Income( loss )per unit A-B=C	$152	$232	$80
b	Process further
	Because when we processing further, selling would result an additional income of $80