731 xx 1 Target pricing, target cost and value engineering roduction labour) and

Question

731 xx 1 Target pricing, target cost and value engineering roduction labour) and rvo a tinll Systematic Ltd hroduG1hannuJECTIVES 1,2,3 Ltd Seation labour) and two activity-based indirect cost categories (engineering,testing). All R&D; and design Systema Se sls G16 for $40.60 per unit. Systematic Ltd has two direct cost categories (direct materials, direct ct, G16, has annual sales of 50000 units. Systematic ts are included in the engineering cost category. There are no marketing, distribution or customer service costs. The cost driver for engineering is engineer-hours and the cost driver for testing is test-hours. Testing gosts are variable costs. Engineering costs are fixed costs based on engineering capacity. Information on annual costs includes the following: Direct materials: $14.98 per unit Direct production labour: $15 per direct production labour-hour Engineering: $14 per engineer-hour (based on capacity of 25000 engineering-hours) Testing:$12 per test-hour Each unit of G16 requires 0.5 direct production labour-hours to produce and 0.25 test-hours to test. labour rates appearing in this chapter have been chosen for calculation purposes and do not reflect real wage rates in Australia.

Explanation / Answer

1. Computation of full cost/Unit and to produce 50000 Unit Per unit Cost Total cost for 50000 unit Direct Material $14.98 $749,000.00 Direct Manufacturing Labour (0.5 Hour*$15) $7.50 $375,000.00 Testing (0.25 Hour*$12) $3.00 $150,000.00 Engineering ($14 Hour*25000Hour)/50000Unit $7.00 $350,000.00 Full Cost $32.48 $1,624,000.00 2. Computation of mark-up% on the Full cost per Unit of G16 Per unit Cost Selling Price $40.60 Less: Full Cost $32.48 Margin $8.12 Markup percentage on Full cost (Margin/Full Cost*100) 25% 3. Computation of full cost/Unit and to produce 60000 Unit Per unit Cost Total cost for 50000 unit Sales Price (a) 40.6 2436000 Direct Material $14.98 $898,800.00 Direct Manufacturing Labour (0.5 Hour*$15) $7.50 $450,000.00 Testing (0.25 Hour*$12) $3.00 $180,000.00 Engineering ($14 Hour*25000Hour)/60000Unit $5.83 $350,000.00 Marketing Cost ($200000/70000unit) $2.86 $200,000.00 Full Cost (b) $34.17 $2,078,800.00 Income on sale of 60000 unit (c=a-b) $6.43 $357,200.00 Income on 50000 Unit (50000unit*$8.12) (d) $406,000.00 Difference in Income (d-c) $48,800.00 Hence, it's not good idea to sell 60000 unit by incurred additional marketing cost of $200000 4. Computation of New Selling Price Per unit Cost Total cost for 50000 unit Sales Price (a) 40.6 2436000 Direct Material $14.98 $898,800.00 Direct Manufacturing Labour (0.5 Hour*$15) $7.50 $450,000.00 Testing (0.25 Hour*$12) $3.00 $180,000.00 Engineering ($14 Hour*25000Hour)/60000Unit $5.83 $350,000.00 Marketing Cost ($200000/70000unit) $2.86 $200,000.00 Full Cost (b) $34.17 $2,078,800.00 Mark Up @25% on Full cost $519,700.00 Minimum Sales price, if 60000 unit Sold $43.31 $2,598,500.00

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