A company is developing a new motorcycle. The team developing the car includes r

Question

A company is developing a new motorcycle. The team developing the car includes representatives from marketing, engineering and cost accounting. The team has developed a set of features that it plans to incorporate in this new motorcycle. The team believes that $5000 will be an attractive price for this product. The company seeks to earn a per unit profit of 30 percent of selling price.


a.) calculate the target cost per unit.

b.) The team has estimated that the costs associated with the product will be $2,000,000 and variable costs to produce and sell the item will be $2,500 per unit. In light of this, how many units must be produced and sold to meet the taret cost per unit?

c.) Suppose the company decides that only $1,400 units can be sold at a price of $5000 and therefore, the target cost cannot be reached. THe company is considering dropping a feature, which adds $600 of variable cost per unit. With this feature dropped, the company believes it can sell 2,500 units at $4000 per unit. Will the company be able to produce the item at the new taret cost, or less?

Explanation / Answer

a) Target selling Price as per company = $5000/unit

Profit Margin            = 30% of $5000 = $1500/unit

Target cost of the company           =$3500/unit

b) Target Cost                        = $3500/unit

     Variable Cost                      = $2500/unit

Fixed Cost allocable per unit = $1000/unit

No. of units to be produced to meet the taget cost = Total Fixed Cost/Fixed Cost allocable per unit

                                                                                =$2000000/$1000

                                                                                = 2000 units

c) New Selling Price = $4000/unit

    Profit Margin = 30%

Traget cost = 70 % of $4000/Unit

                     = $2800/unit

New Variable Cost = ($2500- $600)/unit

                            = 1900/unit

Fixed Cost allocable per unit= Target Cost - Variable Cost

                                              = ($2800-$1900)/unit

                                              = $900/unit

No. of Units = Total Fixed Cost/Fixed Cost allocable per unit

                    = $2000000/$900

                    =2222.222 Units

Yes the Company will be able to produce the item at the target cost or less

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