Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 5

Target Costing, Strategy Benchmark Industries manufactures large workbenches for industrial use. Wayne Garrett, Benchmark’s vice president for marketing, has concluded from his market analysis that sales are dwindling for the standard table because of aggressive pricing by competitors. This table sells for $875 whereas the competition sells a comparable table in the $800 range. Wayne has determined that dropping the price to $800 is necessary to maintain the firm’s annual market share of 10,000 tables. Cost data based on sales of 10,000 tables follow:

	Budgeted Amount	Actual Amount	Actual Cost
Direct materials	400,000 sq. ft.	425,000 sq. ft.	$2,700,000
Direct labor	85,000 hrs.	100,000 hrs.	1,000,000
Machine setups	30,000 hrs.	30,000 hrs.	300,000
Mechanical assembly	320,000 hrs.	320,000 hrs.	4,000,000

Required

1. Calculate the current cost and profit per unit.

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2. What amount of the current cost per unit is attributable to non-value-added activities?

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3. Calculate the new target cost per unit for a sales price of $800 if the profit per unit is maintained.

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4. What strategy do you suggest for Benchmark to attain the target cost calculated in requirement 3?

Step 1 of 5

Target costing is a costing strategy where company gathers information about the price of the competition and then deducts the profit that company is desiring. And the cost that then comes is the target cost.