Jared Monsma, Weekend Golfer\'s vice president for marketing, has concluded from
ID: 2456613 • Letter: J
Question
Jared Monsma, Weekend Golfer's vice president for marketing, has concluded from his marketing analysis that the sales for the standard golf cart have been dwindling because of aggressive pricing by competitors. Weekend Golfer sells these golf carts online for $3,000, whereas the competition sells a comparable cart online in the $2,800 range. Jared has determined that dropping the price to $2,850 would regain the firm's annual market share of 8,000 golf carts. Cost data based on sales of 8,000 gas-operated golf carts follow: Calculate the current cost and profit per unit. How much of the current cost per unit is attributable to non-value added activities? Calculate the new target cost per unit for a sales price of $2,850 if the current profit per unit is to be maintained. What strategy do you suggest for Weekend Golfer to attain the target cost calculated in question c)?Explanation / Answer
a.
Current cost = Direct Material cost + Direct Labor cost + Machine setup cost + Mechanical assembly cost
Current cost = 4500000+1750000+750000+5000000 = $12000000
Current Revenue = Selling price * units sold = 3000*8000 = 24000000
Current profit = 24000000 – 12000000 = $12000000
b.
In all the activities mentioned in the question, machine setup is non-value added activity.
Cost attributed to machine setup = $750000
Thus,
Machine setup cost / unit = total machine setup cost / no. of units = 750000/8000
Machine setup cost / unit = $93.75
c.
At present,
Current cost per unit = 12000000/8000 = $1500
Current profit per unit = 3000 – 1500 = $1500
If selling price comes down to $2850 from$3000
Then cost/ unit needs to be reduced to maintain the profit of $1500.
Reduced cost / unit = 2850 – 1500 = $1350. It will be the target cost / unit.
d.
To achieve the target cost per unit, company need to work towards the budgeted expense and reduce the waste. Thus, achieving budgeted expenses and reducing variance will help the company to achieve the objective.
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