Question

Exercise 16.21 Kaizen costing Blade Runner produces regular scooters and motorised scooters. Blade Runner scooters are considered the most reliable in the marketplace. Demand has been volatile, with huge increases in demand during Christmas and just before university classes begin. In the past, the company filled demand by anticipating demand increases and manufacturing inventories ahead of time. Recently, competition in the motorised scooter line has escalated, and Blade Runner needs to reduce prices and, therefore, cut costs. The motorised scooter's current cost is $150. To be competitive, the marketing department says the price should be 15% lower than the current price. Management currently achieves a pretax return of 15% on sales of the scooters and wants to continue this rate of return. The following per-unit costs for motorised scooters are based on production of 700,000 per year. Direct materials (variable) Direct labor (variable) Machining costs (fixed depreciation and maintenance) Inspection costs (variable) Engineering costs (fixed) Marketing costs (fixed) Administrative costs (fixed) 45 15 10 10 20 25 25 $150 Total cost Required Calculate the price recommended by the marketing department. (Round answer to 0 decimal places.) Price

Answer 1

1)

Price

$150

Explanation:-

Current Price = $150/85%

Current price = $176.471

New price = $176.471 - ($176.471 ×15%)

New Price = $176.471 - $26.471

New Price = $150

2)

Contribution Margin	$22.5
Target cost	$127.5

Explanation:-

The company wants to achieve 15% return on sales, so the New Contribution margin = Selling Price × 15%

New Contribution Margin = $150 ×15%

New Contribution margin = $22.5

Target cost = Selling Price - Contribution margin

Target cost = $150 - $22.5

Target cost = $127.5

3)

Original Amount (A)	Cost Reduction (15%) B =A × 15%	Target Cost (A - B)
$45	$6.75	$38.25
$15	$2.25	$12.75
$10	$1.5	$8.5
$10	$1.5	$8.5
$20	$3	$17
$25	$3.75	$21.25
$25	$3.75	$21.25
$150	$22.5	$127.5