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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:


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 $30 per hour.


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

$fill in the blank 1

per unit


b. Determine the required cost reduction.

$fill in the blank 2

per unit


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


1. Direct labor reduction $fill in the blank 3

per unit

2. Additional inspection $fill in the blank 4

per unit

3. Injection molding productivity improvement $fill in the blank 5

per unit

Total savings $fill in the blank 6

per unit

Sagot :

anthougo

a) The target cost for Model J20, assuming that the historical markup on product cost and selling price is maintained, is $200 per unit.

b) The required cost reduction per unit is $30 per unit ($230 - $200).

c) An evaluation of the three engineering improvements together to determine if the required cost reduction (drift) can be achieved as follows:

While the calculated cost reduction, including direct materials, is $25, the required reduction to achieve the target markup cost is $30.

Thus, the expected target cost reduction does not add up with the calculated cost reduction, envisaged by the engineers.

Data and Calculations:

Model J20 Selling price per unit = $460

Direct materials $175

Direct labor 40

Factory overhead 15

Total $230

Direct labor rate = $30 per hour

Direct labor rate per minute = $0.50 ($30/60)

Direct labor hours per unit = 1¹/₃ hours ($40/$30) or 80 minutes

Direct labor hours per unit reduction:

Normal direct labor time = 80 minutes

Plastic printer cover =        -15 minutes

Total new direct labor time = 65 minutes

Direct labor rate per unit = $32.50 ($0.5 x 65)

Additional inspection time = 6 minutes

Injection molding machine = 1 minute

Direct materials cost = $155 ($175 - $20)

Historical markup = 200% ($460/$230 x 100)

Target cost based on historical markup = $200 ($400 x 100/200)

Required cost reduction per unit is $30 per unit ($230 - $200)

1. Direct labor reduction of $7.50 per unit ($40 - $32.50)

2. Additional inspection $3 per unit (6 x $0.50)

3. Injection molding productivity improvement $0.50 per unit

4. Material cost reduction = $20

Total savings are $25 per unit ($7.50 - $3 + $0.50 + $20).

Learn more about target costing at https://brainly.com/question/20534175

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