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

Exercise 4

Target Costing in a Service Firm Alert Alarm Systems installs home security systems. Two of its systems, the ICU 100 and the ICU 900, have these characteristics:

Design Specifications	ICU 100	ICU 900	Cost Data
Video cameras	1	3	$150/ea.
Video monitors	1	1	$ 75/ea.
Motion detectors	5	8	$ 15/ea.
Floodlights	3	7	$ 8/ea.
Alarms	1	2	$ 15/ea.
Wiring	700 ft.	1,100 ft.	$ 0.10/ft.
Installation	16 hrs.	26 hrs.	$ 20/hr.

The ICU 100 sells for $810 installed, and the ICU 900 sells for $1,520 installed.

Required

1. What are the current profit margins on both systems?

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2. Alert’s management believes that it must drop the price on the ICU 100 to $750 and on the ICU 900 to $1,390 to remain competitive in the market. Recalculate profit margins for both products at these price levels.

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3. Describe two ways that Alert could cut its costs to get the profit margins back to their original levels.

Step 1 of 3

1.??

		ICU 100		ICU 900
	Unit Cost	Quantity	Cost	Quantity	Cost
Video camera	$ 150	1	$150	3	$450
Video monitor	75	1	75	1	75
Motion detector	15	5	75	8	120
Floodlight	8	3	24	7	56
Alarm	15	1	15	2	30
Wiring	.10/ft	700	70	1,100	110
Installation	20/hr	16	320	26	520
?Total			$729		$1,361
Price			$810		$1,520
Profit			$81		$159

ICU 100:  $81/$ 810 = 10% profit margin

ICU 900:  $159/$1,520 = 10.46% profit margin