Samira Company does contract manufacturing of compact video cameras. At its Pacific plant, cost control has become a concern of management. The actual costs per unit for the years 2016 and 2017 were as follows:
20162017
Direct materials
Plastic case...........................$ 7.50$ 7.40
Lens set ............................. 19.00 19.20
Electrical component set ................ 6.60 5.70
Film track ............................ 11.00 9.50
Direct labor............................. 32.00(1.6 hours) 28.00(1.5 hours)
Indirect manufacturing costs
Variable.............................. 7.50 7.10
Fixed................................3.00(100,000 unit base)
2.85(120,000 unit base)
The company manufactures all of the camera components except the lens sets, which it purchases from several vendors. The company has used target costing in the past but has not been able to meet the very competitive global pricing. Beginning in 2017, the company implemented a continuous improvement program that requires cost reduction targets.
Required
a. If continuous improvement (Kaizen) costing sets a first-year target of a 10 percent reduction of the 2016 base, how successful was the company in meeting 2017 per unit cost reduction targets? Support your answer with appropriate computations.
b. Evaluate and discuss Samira’s use of Kaizen costing.