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

Exercise 58

Target Costing Jared Monsma, Weekend Golfer’s vice president for marketing, has concluded from his market analysis that sales have been dwindling for the standard golf cart because of aggressive pricing by competitors. Weekend Golfer sells these golf carts online for $3,000, whereas the competition sells a comparable cart online in the $2,800 range. Jared has determined that dropping the price to $2,850 would regain the firm’s annual market share of 8,000 golf carts. Cost data based on sales of 8,000 gas golf carts follow:

	Budgeted Amount	Actual Amount	Actual Cost
Direct materials	$4,200,000		$4,500,000
Direct labor	100,000 hrs.	125,000 hrs.	1,750,000
Machine setups	75,000 hrs.	75,000 hrs.	750,000
Mechanical assembly	375,000 hrs.	400,000 hrs.	5,000,000

Required

1. Calculate the current cost and profit per unit.

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2. How much 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 $2,850 if the profit per unit is maintained.

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4. What strategy do you suggest for Weekend Golfer 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.