I badly need help on this one. Tia. OBJ. 2 EX 25-20 Target costing Instant Image

Question

I badly need help on this one. Tia.

OBJ. 2 EX 25-20 Target costing Instant Image Inc, manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of $230, as follows: $175 Direct materials Direct labor Factory overhead Total $230 It is estimated that the competitive selling price for color laser printers of this type will drop to $400 next year. Instant Image has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas: 1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 15 minutes per unit. the materials cost by $20 per unit. minutes per part. Forty percent of the direct labor and 48% of the factory overhead 2. Add an inspection step that will add six minutes per unit of direct labor but reduce 3. Decrease the cycle time of the injection molding machine from four minutes to three are related to running injection molding machines The direct labor rate is $30 per hour. a. Determine the target cost for Model J20, assuming that the historical markup on prod- uct cost and selling price is maintained b. Determine the required cost reduction. c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved.

Explanation / Answer

a) Determine the target cost for Model J20, assuming that the historical markup on production cost and selling price is maintained.

Markup on Product Cost = (Sale Price - Cost) / Cost

........................................= ($460 - $230) / $230

........................................= 100%

Let target cost be y

Hence Target Cost = Sale Price - Markup

; Hence Target Cost = Sale Price - (100% x Target cost)

y = $400 - (100% x y)

y + y = $400

2y = $400

y = $200

Hence, target cost = $200

b. Determine the required cost reduction.

Required Cost Reduction = $230 - $200

.........................................= $30

c) Evaluate the three engineering improvements together to determine if the required cost reduction can be achieved.

Direct Labor Reduction = Direct Labor Rate per hour x (Time reduced /60 min.)

......................................= $30 x (15 min. / 60 min.)

......................................= $7.5

Additional Inspection = Saving in direct material - Additional direct labor cost

..................................= $20 - [$30 x (6 min. / 60 min.)]

..................................= $20 - ($30 x 0.1)

..................................= $17

Injection moulding productivity improvements = [($40 x 40%) + ($15 x 48%)] / 4

.........................................................................= ($16 + $7.2) / 4

.........................................................................= $23.20 / 4

.........................................................................= $5.8

Total Savings = Direct Labor Reduction + Additional Inspection + Injection moulding productivity improvements

.......................= $7.5 + $17 + $5.8

.......................= $30.3

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.