Environ Company has determined that its new fireplace screen would gain widespre

Question

Environ Company has determined that its new fireplace screen would gain widespread customer acceptance if the company could price it at or under $90. Anticipated labor hours and costs for each unit of the new product are as follows.
Direct Materials cost=$15
Direct Labor cost
Manufacturing Labor
Hours =1.2
Hourly Labor Rate= $12
Assembly labor
Hours =1.5
Hourly labor rate =$10
Machine hours = 2

The company currently uses the following three activity-based cost rates:
Materials handling $1.30 per dollar of direct materials
Production $3.00 per machine hour
Product Delivery $5.50 per unit

The company's minimum desired profit is 25 percent over total production and delivery cost. Compute the target cost for the new fireplace screen, and determine if the company should market it.

Explanation / Answer

                                                  Cost per unit
Direct Materials                                 $15.00
Direct Labor
Manufacturing Labor 1.2 x $12          $14.40
Assembly Labor         1.5 x $10          $15.00

Overheads
Materials Handling   1.5 x $1.30        $19.50
Production                 2 x $3.00          $6.00
Product Delivery                                $5.50
Total Production & Delivery Cost       $75.40
Add : Desired profit 25%                 $18.85
Selling Price per unit                    $94.25
                                                    =======
Since calculated selling price of $94.25 per unit is more than the maximum anticipated price of $90.00 per unit, the company shhould not market it if it is rigid to get 25% profit over total cost.

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