Problem 18-47 Name:
Insert your answers in the gray-shaded cells or choose from drop-down
list. If an answer is incorrect, the word “wrong” will appear.
a.
Year of
Life Cycle
Units Price Revenue
Year 1 100,000 2.50$ 250,000$
Year 2 250,000 2.40$ 600,000
Year 3 350,000 2.30$ 805,000
Year 4 500,000 2.10$ 1,050,000
Year 5 600,000 2.00$ 1,200,000
Year 6 450,000 2.00$ 900,000
Year 7 200,000 1.90$ 380,000
Year 8 130,000 1.90$ 247,000
Totals 2,580,000 5,432,000$
Target cost calculation:
Total revenue 5,432,000$
Desired Percent
Profit margin 25% 1,358,000
Target cost 4,074,000$
Divided by total units 2,580,000
Unit target cost 1.58$
b. Total production cost estimate:
Fixed costs:
Fixed costs per year 200,000$
x Number of years 8
Total fixed costs 1,600,000$
Variable costs:
Total variable cost per unit 2.60$
x Number of units 2,580,000
Total variable costs 6,708,000
Total estimated product costs 8,308,000$
Solution
Discuss how management might use the comparison of target costs to
estimated costs.
c.
Should Gourmet Grade begin
production of the new entrée?
No
The comparison of the estimated production costs to the target production
cost is very unfavorable. Note that the expected, actual variable costs
substantially exceed the target cost. Hence, is highly likely that the
company will need to redesign the product to bring actual cost into
alignment with the target cost. Kaizen methods alone cannot feasibly
close the cost gap.