Target Costing Laser Cast, Inc., manufactures color laser printers. Model J20 pr

Question

Target Costing

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $200 and has a total product cost of $160, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $190 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $4 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines.

The direct labor rate is $13 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Explanation / Answer

Solution:

Existing selling price of printer = $200 per unit

Existing cost per unit = $160

Existing margin per unit = $200 - $160 = $40 per unit

Mark up on cost = 40/160*100 = 25%

Mark up on Sale = 40/200*100 = 20%

Revised selling price next year = $190 per unit

Target margin per unit if historical markup to be maintained = 190*20% = $38

Target cost to maintain historic mark-up = $190 - $38 = $ 152 per unit

Required cost reduction = 160 – 152 = $8 per unit

Cost saving with improvements:

Direct labor rate = $13/Hour

Saving per unit due to this improvement = $13/60*9 = $1.95 per unit

Saving per unit due to this improvement = $4 – 13/60*6 = $2.70 per unit

30% direct labor and 45% of factory overhead are related to this activity, it means

Direct labor = 30*30% = $9 per unit is cost of this activity

Factory overhead = 10*45% = $4.50 per unit is cost of this activity

Saving per unit due to injection molding productivity improvement = ($9 + $4.50) * 25% = $3.38 per unit

Total cost saving due to improvement = $1.95 + $2.70 + $3.38 = $8.03 per unit

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