Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $455 and has a product cost of $218, as follows: Cost Driver Dollar Amount Direct materials $165 Direct labor 35 Factory overhead 18 Total 218 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: 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. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $20 per unit. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Forty percent of the direct labor and 48% of the factory overhead are related to running injection molding machines. The direct labor rate is $32 per hour. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price are maintained. 2.Determine the required cost reduction. 3.. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 19E

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Question

Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $455 and has a product cost of $218, as follows:

Cost Driver	Dollar Amount
Direct materials	$165
Direct labor	35
Factory overhead	18
Total	218

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:

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.
Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $20 per unit.
Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Forty percent of the direct labor and 48% of the factory overhead are related to running injection molding machines.

The direct labor rate is $32 per hour.