Question

Paragon Corporation has an aggressive research and development (R&D) program and uses target costing to aid in the final decision to release new products to production. A new product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique features will generate a total demand of 40,000 units at an average price of $250. Design and production engineering departments have performed a value analysis of the product and have determined that the total cost for the various value-chain functions using the existing process technology are as follows: E (Click the icon to view the total costs.) Management has a target profit percentage of 10% of sales. Production engineering indicates that a new process technology can reduce the manufacturing cost by 30%, but it will cost $220,000. Read the requirements. Requirement 1. Assuming the existing process technology is used, should the new product be released to production? Explain. The unit target cost is $ The expected average unit cost if the new product is released to production would be $ The new product be released to production because the expected average unit cost is the unit target cost. Requirement 2. Assuming the new process technology is purchased, should the new product be released to production? Explain. First, calculate the total cost savings if the new process technology is purchased. 0 Data Table The total cost savings will be $ If the new process technology is purchased, the expected average unit cost will be $ The new product V be released to production because the expected average unit cost is the unit target cost. Total Cost over Product Life 3,300,000 790,000 Value-Chain Function Research and Development Design Manufacturing Marketing Distribution Customer Service 3,000,000 400,000 1,400,000 710,000 9,600,000 Total Cost over Product Life Print Done

Answer 1

Refer to the below image for the above mentioned requirements, in a detailed way of solution.

1) Assuming The new the existing product be process realeased technology is to production used should ? Explain. Answer unit targest cost - Target price - Target profit =9250 - ($250 x 1510) a $250-125 79225 Existing unit cost - Total cost over product life Total Demand $ 9600 000 - 40000 chits = $240 should not be released to production, process technology you & The new under product existing the cost 2) Assumingh the new process technology is used / purchased I should the new product be released to product 2 Explain. Answer: Total cost savings - Reduction in mtg cost by goto (-) = $3000000 * 301. -$ 220000 - $ 900000 - $ 220000 a 51 680000 Total cost savings, por unit & & 680000 = 40000 onits $ 17 per unit - The new expected average chit cost will be reduced to $240 – $117 - 1223 which is below the target cost. So the new product should be released to production.