Question

Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, powerful outboards. The part sells for $700, and sales volume averages 35,000 units per year. Recently, MaxiDrive’s major competitor reduced the price of its equivalent unit to $678. The market is very competitive, and MaxiDrive realizes it must meet the new price or lose significant market share. Management has begun paying closer attention to costs and has reconfirmed the current existing standard costs. The controller then assembled the following cost and usage data for the most recent year for MaxiDrive’s production of 35,000 units:

Budgeted Budgeted Actual Actual
Quantity Cost Quantity Cost
Direct materials $ 7,500,000 $ 8,000,000
Direct labor 2,660,000 3,125,000
Indirect labor 2,900,000 2,620,000
Inspection (hours and cost)1,320 500,000 2,000 450,000
Materials handling (number of
purchases and cost) 6,500 1,000,000 4,450 985,000
Machine setups
(number and cost) 2,400 1,250,000 2,500 1,225,000
Returns and rework
(number of times and cost) 500 180,000 700 230,000
$ 15,990,000 $ 16,635,000

Required:

1. Calculate the target cost for maintaining current market share and profitability. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

$453

Step-by-step explanation:

The computation of target cost is shown below:-

For computing the target cost first we need to solve the current unit cost which is here below:-

Current unit cost = Actual cost of Returns and rework ÷ Number of Units

= $16,635,000 ÷ 35,000 units

= $475.29

Profit at present per unit = Actual Quantity of Returns and rework - Current unit cost

= 700 - $475.29

= $225

So, Target cost to reach the competitive price = Equivalent units - Profit at present per unit

= $678 - $225

= $453

Therefore, for computing the target cost we simply deduct the profit at present per unit from equivalent units