arget Costing Oregon Equipment Company wants to develop a new log-splitting mach
ID: 2478974 • Letter: A
Question
arget Costing
Oregon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 5,000 log-splitting machines per year at a retail price of $600 each. An independent catalog company would handle sales for an annual fee of $3,000 plus $50 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $60 per unit.
If company management desires a return equal to 10 percent of the final selling price, what is the target conversion and administrative cost per unit? Round answer to the nearest cent. $Answer
Explanation / Answer
Target profit = $ 600 x 10% = $ 60
Selling and marketing expenses = $ 50 + 3,000/5,000= $ 50 + 0.6 = $ 50.60
Gross profit required = $ 60 + $ 50.60 = $ 110.60
Target cost for 5000 units = $ 600- $ 110.60 = $ 489.40
Conversion and administrative cost per unit = Target cost – material cost per unit = $ 489.4 – $ 60 = $ 429.4 or $ 429.00
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