Exercise 18-23 Name:
Insert your answers into the gray-shaded cells. If an answer is
incorrect, the word “wrong” will appear.
Changes needed to costs:
Estimated first-year costs per unit 145$
Target cost per unit 15
Amount that costs need to be reduced 130$
1. Write a memo that analyzes the prospects for this product.
2. Write a memo that discusses possible organizational strategies.
The memo should include the following:
Given that the target cost is $130 and the anticipated actual first-year
expected cost is $140, it is apparent that it will be impossible to realize
the required profit of $15 per unit unless changes are made.
Solution
The memo should include the following:
There are two major courses of action. First, management should ask
the product engineers to review product design and specifications with
the purpose of reducing expected average total life-cycle cost to the
required $130 target cost. Failing success in this endeavor, management
could consider launching the product with the objective of achieving
long-term cost reductions through kaizen costing techniques. If
management is pessimistic about the company’s ability to achieve the
required long-term reductions in cost, the plans for the product should
be abandoned.