Question

Target Costing Oregon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 5,000 log-splitting machines per year at a retail price of $600 each. An independent catalog company would handle sales for an annual fee of $3,000 plus $50 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $60 per unit. If company management desires a return equal to 10 percent of the final selling price, what is the target conversion and administrative cost per unit? Round answer to the nearest cent

Answer 1

Oregon Equipment Company

Target Costing:

Conversion and Admin cost per unit = $2,147,000/5,000 = $429.40

Step-by-step explanation:

a) Data and Calculations:

Sales Revenue $3,000,000 (5,000 x $600)

Cost of materials $300,000 (5,000 x $60)

Sales Commission $253,000 ($3,000 + (5,000 x $50)

Conversion & Admin cost $2,147,000

Target Profit $300,000

b)The Conversion and Admin. cost of $2,147,000:

= Sales Revenue minus cost of materials minus sales commission minus target profit.

c) The target cost is the cost that is required to make a target profit. This can be reversed with a target profit being worked out first before the target cost is achieved. The target cost then will be the difference between the sales minus the target profit, all other things being equal.