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Target costing Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of $230, as follows: Direct materials $175 Direct labor 40 Factory overhead 15 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. 2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $20 per unit. 3. 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 $30 per hour. 1. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price is maintained. 2. Determine the required cost reduction. 3. Evaluate the three engineering improvements together to determine whether the required cost reduction (drift) can be achieved.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 25, Problem 25.20EX
Textbook Problem

Target costing

Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of $230, as follows:

Direct materials $175
Direct labor 40
Factory overhead 15
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.

2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $20 per unit.

3. 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 $30 per hour.

1. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price is maintained.

2. Determine the required cost reduction.

3. Evaluate the three engineering improvements together to determine whether the required cost reduction (drift) can be achieved.

Expert Solution

a)

To determine

Product pricing: Product pricing is the method used for fixing the price for the products sold or the services offered to the consumers.

Target cost concept:   Target cost is the estimated cost of the product which is calculated on the basis of sustainable price in the marketplace.

 Target Cost = Expected Selling Price – Desired Profit

To Determine: The target cost for Model J20, based on historical markup on the product cost and the selling price which is maintained.

Explanation of Solution

Markup Percentage: The markup percentage is the percentage of additional costs added to the product cost to get the selling price of the product

Calculate the historical markup on the product cost.

Historical markup percentage = Selling Price CostTotal Cost$460$230$230= 100%

Hence, historical markup on the product cost is 100% or historical markup cost is 50% of selling price

Expert Solution

b)

To determine
The required cost reduction.

Expert Solution

c)

To determine

To Evaluate: The three engineering improvements to achieve the required cost reduction.

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Chapter 25 Solutions

Accounting
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