Straightforward Target Costing, Value Engineering
Argosy, Inc., uses target costing and will soon enter a very competitive marketplace in which
it will have limited influence over the prices that are charged.
Management and consultants
are working to fine-tune the company's sole service, which hopefully will generate a 12%
return (profit) on the firm's $24,000,000 asset investment.
The following information is
Hours of service to be provided: 34,000
Anticipated variable cost per service hour: $30
Anticipated fixed cost: $2,560,000 per year
How much profit must Argosy produce to achieve a 12% return?
Calculate the revenue per hour that Argosy must generate to achieve a 12% return.
Assume that prior to entering the marketplace, management conducted a planning exercise
to determine whether a 14% return could be attained in year no. 2
Can the company
achieve this return if (a) competitive pressures dictate a maximum selling price of $195
per hour and (b) service hours, variable cost per service hour, and fixed costs are the same
as the amounts anticipated in year no. 1?
If your answer to part "C" is "no," suggest and briefly describe a procedure that Argosy
might use to achieve desired results.
LO: 5, 8
Type: A, N
Argosy's target profit is $2,880,000 ($24,000,000 x 12%).
Total revenues must be sufficient to cover costs and produce the target profit.
revenues equal $6,460,000 [(34,000 hours x $30) + $2,560,000 + $2,880,000].
revenue per hour must be $190 ($6,460,000 ÷ 34,000 hours).
Argosy's target profit is $3,360,000 ($24,000,000 x 14%).
Total revenues must equal
$6,940,000 [(34,000 hours x $30) + $2,560,000 + $3,360,000], and the revenue per hour
must be $204.12 ($6,940,000 ÷ 34,000 hours).
A 14% return requires that Argosy produce revenue per service hour of $204.12,
which is in excess of the $195 maximum market price.
To achieve a 14% return and a $195 revenue-per-hour figure, the company must trim its
Argosy could use value engineering, a technique that utilizes information collected
about a service's design and associated processes.
The goal is to examine the design and
processes and then identify improvements that would produce cost savings.
Hilton, Managerial Accounting, Seventh Edition