Target Costing Oregon Equipment Company wants to develop a new log-splitting mac
ID: 2517698 • Letter: T
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 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 $2,000 plus $60 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $110 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. $
Explanation / Answer
Target cost is computed as follows:
Target cost = Expected selling price – Target profit
Details
Amount
Amount
Sales
$ 3,000,000
Less: Profit @10%
$ -300,000
Target cost
$ 2,700,000
Less: Cost of raw material
$ 550,000
Sales handling cost [2000+ (60*5000)]
$ 302,000
$ 852,000
Target conversion and administrative cost
$ 1,848,000
Target conversion and administrative cost per unit = $1,848,000 / 5,000
= $369.60
Therefore, target conversion and administrative cost per unit is $369.60.
Details
Amount
Amount
Sales
$ 3,000,000
Less: Profit @10%
$ -300,000
Target cost
$ 2,700,000
Less: Cost of raw material
$ 550,000
Sales handling cost [2000+ (60*5000)]
$ 302,000
$ 852,000
Target conversion and administrative cost
$ 1,848,000
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