Target Costing Oregon Equipment Company wants to develop a new log-splitting mac

Question

Target Costing

Oregon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 6,000 log-splitting machines per year at a retail price of $700 each. An independent catalog company would handle sales for an annual fee of $2,000 plus $50 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $80 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 = $700 x 10% = $70

Selling and marketing expenses = $50 + ($2000/6000)= $50.33

Gross profit needs to be $70 +$50.33 = $120.33

Target cost at 6000 units = $700-$120.33= $579.67 per unit

This includes materials cost of $80 per unit.

Hence, target conversion and administrative cost per unit = $579.67 - $80 = $499.67

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