Symphony Sound is designing a portable recording studio to be sold to consumers.
ID: 2773251 • Letter: S
Question
Symphony Sound is designing a portable recording studio to be sold to consumers. The team developing the product includes representatives from marketing, engineering, and cost accounting. The recording studio will include sound-canceling monitor headphones, audio recording and enhancement software, several instrumental and vocal microphones, and portable folding acoustic panels. With this set of features, the team believes that a price of $4,520 will be attractive in the market place. Symphony Sound seeks to earn a per unit profit of 25 percent of selling price.
(a)
b. The team has estimated that the fixed production costs associated with the product will be $1,687,500 and variable costs to produce and sell the item will be $2,700 per unit. In light of this, how many units must be produced and sold to meet the target cost per unit?
c. Suppose the company decides that only 2,000 units can be sold at a price of $4,520 and, therefore, the target cost cannot be reached. The company is considering dropping the folding acoustic panels, which add $650 of variable cost per unit With this feature dropped, the company believes it can sell 2,600 unit at $3,700 per unit Will Symphony Sound be able to produce the item at the new target cost or less?
Kindly please show workings. I would like to understand the concepts and steps.
Symphony Sound is designing a portable recording studio to be sold to consumers. The team developing the product includes representatives from marketing, engineering, and cost accounting. The recording studio will include sound-canceling monitor headphones, audio recording and enhancement software, several instrumental and vocal microphones, and portable folding acoustic panels. With this set of features, the team believes that a price of $4,520 will be attractive in the market place. Symphony Sound seeks to earn a per unit profit of 25 percent of selling price.
Explanation / Answer
Answer: (a) Calculstion of the target cost per unit:
The target cost formula is:
Target cost = Market price – Desired profit.
In this case, the market price is $4520 and the desired profit is $1130 (25% X $4520).
Therefore the target cost is
=($4520-$1130)=$3390
Answer:(b)
Fixed costs plus target income are added together and divided by the contribution margin per unit.
Required sales in units = ($1687500 /($4520 - $3390) = 1493.4 units
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