Problem
Yuan Hwang Corp. is considering marketing two new graphing calculators, named Speed-Calc 4 and Speed-Calc5. According to recent market research, the two products will surpass the current competition in both speed and quality and would be welcomed in the market. Customers would be willing to pay $98 for Speed-Calc 4 and $110 for Speed-Calc 5, based on their projected design capabilities. Both products have many uses, but the primary market interest comes from college students. Current production capacity exists for the manufacturer and assembly of the two products. The company has a minium desired profit of 25 percent above all costs for all of its products. Current activity-based cost rates follow:
Materials/parts handling $1.20 per dollar of DM and purchased parts cost / Production $8.00 per machine hour / Marketing/delivery $4.40 per unit Speed-Calc 4 & $6.20 per unit Speed-Calc 5
Design engineering and accounting estimates to produce the two new products follow:
Speed-Calc 4 Speed-Calc 5
Projected unit-demand $100,000 80,000
Per-unit data:
DM cost $5.50 $7.50
Computer Chip cost $10.60 $11.70
Production labor:
Hours 1.2 1.3
Hours labor rate $16.00 $16.00
Assembly labor:
Hours 0.6 0.5
Hours labor rate $12.00 $12.00
Machine hours 1 1.2
Required:
1. Compute the target costs for each product.
2. Compute the projected total unit cost of production and delivery.
3. Using the target costing approach, decide whether the products should be produced.