Target Costing MaxiDrive manufactures a wide variety of parts for recreational boating, including a gear and driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, powerful outboards. The part sells for $610, and sales volume averages 25,000 units per year. Recently, MaxiDrive’s major competitor reduced the price of its equivalent unit to $550. The market is very competitive, and MaxiDrive realizes it must meet the new price or lose significant market share. The controller has assembled these cost and usage data for the most recent year for MaxiDrive’s production of 25,000 units:
| Budgeted Quantity | Budgeted Cost | Actual Quantity | Actual Cost |
Materials |
| $ 6,500,000 |
| $ 7,000,000 |
Direct labor |
| 2,500,000 |
| 2,625,000 |
Indirect labor |
| 2,500,000 |
| 2,400,000 |
Inspection (hours and cost) | 920 | 300,000 | 1,000 | 350,000 |
Materials handling (number of |
|
|
|
|
purchases and cost) | 3,500 | 500,000 | 3,450 | 485,000 |
Machine setups (number and cost) | 1,400 | 750,000 | 1,500 | 725,000 |
Returns and rework (number of |
|
|
|
|
times and cost) | 300 | 80,000 $13,130,000 | 500 | 130,000 $13,715,000 |
Required
1. Calculate the target cost for maintaining current market share and profitability.
2. Can the target cost be achieved? How?
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