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

Exercise 51

Target Costing?MaxiDrive manufactures a wide variety of parts for recreational boating, including a gear and driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, powerful outboards. The part sells for $610, and sales volume averages 25,000 units per year. Recently, MaxiDrive’s major competitor reduced the price of its equivalent unit to $550. The market is very competitive, and MaxiDrive realizes it must meet the new price or lose significant market share. The controller has assembled these cost and usage data for the most recent year for MaxiDrive’s production of 25,000 units:

	Budgeted Quantity	Budgeted Cost	Actual Quantity	Actual Cost
Materials		$ 6,500,000		$ 7,000,000
Direct labor		2,500,000		2,625,000
Indirect labor		2,500,000		2,400,000
Inspection (hours and cost)	920	300,000	1,000	350,000
Materials handling (number of
purchases and cost)	3,500	500,000	3,450	485,000
Machine setups (number and cost)	1,400	750,000	1,500	725,000
Returns and rework (number of
times and cost)	300	80,000 $13,130,000	500	130,000 $13,715,000

Required

1. Calculate the target cost for maintaining current market share and profitability.

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2. Can the target cost be achieved? How?

Step 1 of 4

1.?The unit cost is currently $548.60 = $13,715,000/25,000

    The current profit per item is $610 - $548.60 = $61.40

Thus, the target cost to meet the competitive price is:

$550 - $61.40 = $488.60