Problem:
Blade Runner produces regular scooters and motorized scooters. Blade Runner scooters are considered the most reliable in the marketplace. Deman has been volatile, with huge increases in demand during Christmas and Hanukah and just before university classes begin in the fall. In the past, the company filled demand by anticipating demand increases and manufacturing inventories ahead of time.
Recently, competition in the motorized scooter line has escalated, and Blade Runner needs to reduce prices and, therefore, cut costs. The motorized scooter's current cost is $150. To be competitive, the marketing department says the price should be 10% lower than the current price. Management currently achieves a pretax return of 10% on sales of the scooters and wants to continue this rate of return.
The following per-unit costs for motorized scooters are based on production of 700,000 per year:
Direct Materials (variable) $45
Direct Labor (variable) 15
Machining costs (fixed depreciation and maintenance) 10
Inspection costs (variable) 10
Engineering costs (fixed) 20
Marketing costs (fixed) 25
Administrative costs (fixed) 25
Total cost $150
A. Calculate the price recommended by the marketing department.
B. Given the price you calculated in part A, calculate the new contribution margin and the target cost.
C. Calcucate the planned cost reduction for each cost category, assuming proportional cost reduction across categories.