Question
Pacific Decor lnc designs manufactures as well as sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of the past month working on the design of a high-end dining room table. The design has been well-received by Jose Alvarez the product development manager. But Alvarez wants to make sure that the table can be priced competitively. Amy Hoover, Pacific's cost accountant presents Alvarez with the following cost data for the expected production of 200 tables
Design $5000
Direct Materials 120000
Direct Manufacturing labor 142000
Variable manufacturing overhead 64000
Fixed manufacturing overhead 46500
Marketing 15000
1) Alvarez thinks that Pacific can effectively market the table for $2,000. The company's target operating income is l0% of revenue. Compute the target full cost of producing the 200 tables. Does the cost approximation developed by Hoover meet Pacific's requirements? Is value engineering needed?
2) Alvarez discovers that Li has intended the table two inches wider than the standard size of wood normally used by Pacific. Reducing the table's size by two inches will lower the cost of direct materials by 40%. Nevertheless the redesign will require an additional $6,000 of design cost and the table will be sold for $1,950. Will this design change permit the table to meet its target cost? Are the costs of materials a locked-in cost?
3) Li insists that the two inches are an utter necessity in terms of the table's design. She trusts that spending an additional $7,000 on better marketing will permit Pacific to sell the tables for $2,200. If this is the case will the table's target cost be attained without any value engineering?
4) Equate the total operating income on the 200 tables for requirements 2 and 3. What do you recommend Pacific do based exclusively on your calculations? Explain fleetingly