Question

Target costing calculations and life cycle cost A company is planning a new product. Market research information suggests that the product will sell 10,000 total units at a price of $21.00 per unit. The company estimates the lifetime costs of the product as follows: • Design and development costs: $50,000 • Manufacturing costs: $10 per unit • End-of-life costs: $20,000 The company estimates that if it were to spend an additional $15,000 on design, then manufac- turing costs per unit could be reduced. Required (a) What is the target cost of the product if the company seeks a markup of 40% of product cost? (b) What is the maximum allowable product manufacturing cost per unit if the company seeks a markup of 40% of the original life-cycle cost? (c) If the additional $15,000 were spent on design, what is the maximum allowable manufactur- ing cost per unit if the company seeks a markup of 40% of the new life-cycle cost?

Answer 1

(0) maakup of 40% of product cost Target Cost of product Selling price per unit (100 mask-up)it (100+4074 14004 $15.00 per unit [b] markup of 60% of the original life-cycle cost Maximum Original life-cycle cost pis wait unit = 21 140444 $15.00 of these how much is due to the desigo and developm- rent costs f end-of-life costs Design and development costs +_ End-of-life_costs Total units $ 50,000 + $ 20,000 10,000 11 $92000 10,000 $ 7:00

$ 15:00 - $7.00 Maximum allowable_product_manufacturing cost per unit [ 8.00 per unit (c) markup of hot. of the new life cycle cost maximum new life-cycle cost per unit 3 21.00 140-1 $15.00 of these, how much is due to the new design and development costs & end-of-life costs. New design and development costs + Total units End-of-life costs $ (50,200 + 15,000) 10,000 + $ 20,000 $ 65,000 + $ 20,000 10,000 ul $8.50 . maximum_allowable manufacturing cost per unit $_15-00 $ 8.50 $ 6.50 per unit