Question

Target Costing

Laser Impressions, Inc., manufactures color laser printers. Model J20 presently sells for $225 and has a total product cost of $180, as follows:

Direct materials	$130
Direct labor	30
Factory overhead	20
Total	$180

It is estimated that the competitive selling price for color laser printers of this type will drop to $210 next year. Laser Impressions 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 $5 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 $13 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.
$168

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$12

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

Answer:-

a. The target cost is determined as follows:

Given , that current markup percentage on product cost will be maintained,

Current markup on cost = (selling price - cost) / cost*100

=>((225 -180)/180)*100 =>25%.

Given that price will drop to $210.

this means that,

Target cost + 25% of target cost = $210.............(since mark up of 25% will be maintained)

=> target cost = $210 / 125% =>$168.

b.Required cost reduction:

Current cost	$180
Target cost	($168)
Required reduction	$12

C.Evaluation of the engineering improvements:

1. Effect of Direct labour reduction by purchasing a plastic cover

=> 9 minutes of direct labour => $13 / 60 *9 =>$1.95.

2.Additional inspection:

DIrect material redution	$5
Less: addition to direct labour ($13/60*6 =1.3)	($1.3)
Net reduction	$3.7

3.Injection moulding prductivity improvement:

30% of labour cost is reduced by 1/4th => (30*30%*1/4)	$2.25
42% of factory overhead is reduced by 1/4th => (20*42%*1/4)	$2.10
Total reduction	$4.35

Now, FInal calculation of total redution:

1.Direct Labour reduction	$1.95
2.Additional inspection	$3.7
3.Injection molding productivity improvement	$4.35
Total savings	$10.
Required savings	$12

The required cost reduction cannot be achieved by proposed improvements.

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