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 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.

Explanation / Answer

Target conversion and administrative cost per unit = Sell Price - (Annual Fee/No of log splitting machine) - Handling cost per unit - Raw material cost - Target profit

Target conversion and administrative cost per unit = $600 - ($3,000/5,000) - $50 - $60 - (10%*$600)

Target conversion and administrative cost per unit = $429.40

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