12 CHAPTER PRICING DECISIONS AND COST MANAGEMENT 12-37 1. Design cost Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Marketing Total cost 5,000 120,000 142,000 64,000 46,500 15,000 $ 392,500 $ Value engineering, target pricing, and locked-in costs.
Cost per unit ($392,500 200) $1,962.50 Target cost per unit ($2,000 0.90) $1,800.00 The cost estimate developed by Hoover does not meet Pacific's requirements. Value engineering will be needed to reduce the cost per unit to the target cost. 2. Total costs (requirement 1) Less: Reduction in material costs ($120,000 40%) Add: Increase in design costs Total costs of redesigned table Revised cost per unit ($350,500 200 tables) Revised target cost per unit ($1,950 0.90) $ 392,500 (48,000) 6,000 $ 350,500 $1,752.50 $1,755.00
The design change allows the table to meet Pacific's for requirements target costing. The cost of materials are a locked-in cost once the design is finalized. 3. Revised total cost ($392,500 + $7,000) Revised cost per unit ($399,500 200) Revised target cost per unit ($2,200 0.90) $ 399,500 $1,997.50 $1,980.00
No, this proposal does not allow the table to meet Pacific's requirements for target costing. 4. Revenue ($1,950 200; $2,200 200) Total costs Operating income Requirement 2 $390,000 350,500 $ 39,500 Requirement 3 $440,000 399,500 $ 40,500
Even without value engineering, Pacific Decor should implement the actions in requirement 3. It should spend $7,000 on marketing if it can achieve a higher price of $2,200 even though it does not achieve the target cost because it earns a higher overall operating income. Doing value engineering will help it increase operating income even more relative to requirement 2. 12-1