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 $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

Catalog company annual fees

Catalog company Variable fee

(18,48,000 / 5000units)

$ 370   

($) Sales Value (5,000*$ 600) 30,00,000 LESS: Cost

Catalog company annual fees

                 2,000

Catalog company Variable fee

(5,000*$ 60) 3,00,000 Cost of Raw materials (5000*110) 5,50,000 Profit Excluding Conversion and Admin Cost 21,48,000 Desired return (10 percent of the final selling price) (10% of 30,00,000)            3,00,000 So, Target Conversion and Admin Cost          18,48,000 Target Conversion and Admin Cost/Unit

(18,48,000 / 5000units)

$ 370   

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