Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 109

Target costing Canton Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. Canton Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs to correctly assess its ability to compete. The market price for this binocular style is well established at $49 per unit. Canton has enough square footage in its plant to accommodate the new production line, although several pieces of new equipment would be required; their estimated cost is $2,500,000. Canton requires a minimum ROI of 10% on any product line investment and estimates that if it enters this market with its digital binocular product at the prevailing market price, it is confident of its ability to sell 20,000 units each year.

Required:

a. Describe, in general terms, any costs that Canton Company would consider relevant to the decision of entering the digital binocular market.

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b. Calculate the target cost per unit for entry into the digital binocular market.

Step 1 of 5

a) Canton Company would think about the following costs as significant to the decision while entering into the digital binocular market:

• Cost of designing and engineering

• Cost of new equipment

• Cost of raw materials

• Cost of direct labor

• Cost of variable overhead

Apart from it, any potential new fixed overhead costs for example a production supervisor remuneration that is wholly keen to this product line. No another facility costs are essential for such product line because current plant has sufficient square footage to put up this new product line.