14-37 Value engineering, target pricing, and locked-in costs. Wood Creations designs, manufactures, and sells modern wood sculptures. Sally Jensen is an artist for the company. Jensen has spent much of the past month working on the design of an intricate abstract piece. Jim Smoot, product development manager, likes the design. However, he wants to make sure that the sculpture can be priced competitively. Alexis Nampa, Wood's cost accountant, presents Smoot with the following cost data for the expected production of 75 sculptures: Design cost Direct materials $ 8,000 32,000 Direct manufacturing labor 38,000 Variable manufacturing overhead 32,000 Fixed manufacturing overhead Marketing 26,000 14,000 1. Smoot thinks that Wood Creations can successfully market each piece for $2,500. The company's tar- get operating income is 25% of revenue. Calculate the target full cost of producing the 75 sculptures. Does the cost estimate Nampa developed meet Wood's requirements? Is value engineering needed? 2. Smoot discovers that Jensen has designed the sculpture using the highest-grade wood available, rath- er than the standard grade of wood that Wood Creations normally uses. Replacing the grade of wood will lower the cost of direct materials by 60%. However, the redesign will require an additional $1,100 of design cost, and the sculptures will be sold for $2,400 each. Will this design change allow the sculpture to meet its target cost? Is the cost of wood a locked-in cost? 3. Jensen insists that the higher-grade wood is a necessity in terms of the sculpture's design. She be- lieves that spending an additional $3,000 on better marketing will allow Wood Creations to sell each sculpture for $2,700. If this is the case, will the sculptures' target cost be achieved without any value engineering?
14-37 Value engineering, target pricing, and locked-in costs. Wood Creations designs, manufactures, and sells modern wood sculptures. Sally Jensen is an artist for the company. Jensen has spent much of the past month working on the design of an intricate abstract piece. Jim Smoot, product development manager, likes the design. However, he wants to make sure that the sculpture can be priced competitively. Alexis Nampa, Wood's cost accountant, presents Smoot with the following cost data for the expected production of 75 sculptures: Design cost Direct materials $ 8,000 32,000 Direct manufacturing labor 38,000 Variable manufacturing overhead 32,000 Fixed manufacturing overhead Marketing 26,000 14,000 1. Smoot thinks that Wood Creations can successfully market each piece for $2,500. The company's tar- get operating income is 25% of revenue. Calculate the target full cost of producing the 75 sculptures. Does the cost estimate Nampa developed meet Wood's requirements? Is value engineering needed? 2. Smoot discovers that Jensen has designed the sculpture using the highest-grade wood available, rath- er than the standard grade of wood that Wood Creations normally uses. Replacing the grade of wood will lower the cost of direct materials by 60%. However, the redesign will require an additional $1,100 of design cost, and the sculptures will be sold for $2,400 each. Will this design change allow the sculpture to meet its target cost? Is the cost of wood a locked-in cost? 3. Jensen insists that the higher-grade wood is a necessity in terms of the sculpture's design. She be- lieves that spending an additional $3,000 on better marketing will allow Wood Creations to sell each sculpture for $2,700. If this is the case, will the sculptures' target cost be achieved without any value engineering?
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Transcribed Image Text:14-37 Value engineering, target pricing, and locked-in costs. Wood Creations designs, manufactures,
and sells modern wood sculptures. Sally Jensen is an artist for the company. Jensen has spent much of the
past month working on the design of an intricate abstract piece. Jim Smoot, product development manager,
likes the design. However, he wants to make sure that the sculpture can be priced competitively. Alexis
Nampa, Wood's cost accountant, presents Smoot with the following cost data for the expected production
of 75 sculptures:
Design cost
Direct materials
$ 8,000
32,000
Direct manufacturing labor
38,000
Variable manufacturing overhead
32,000
Fixed manufacturing overhead
Marketing
26,000
14,000
1. Smoot thinks that Wood Creations can successfully market each piece for $2,500. The company's tar-
get operating income is 25% of revenue. Calculate the target full cost of producing the 75 sculptures.
Does the cost estimate Nampa developed meet Wood's requirements? Is value engineering needed?
2. Smoot discovers that Jensen has designed the sculpture using the highest-grade wood available, rath-
er than the standard grade of wood that Wood Creations normally uses. Replacing the grade of wood
will lower the cost of direct materials by 60%. However, the redesign will require an additional $1,100 of
design cost, and the sculptures will be sold for $2,400 each. Will this design change allow the sculpture
to meet its target cost? Is the cost of wood a locked-in cost?
3. Jensen insists that the higher-grade wood is a necessity in terms of the sculpture's design. She be-
lieves that spending an additional $3,000 on better marketing will allow Wood Creations to sell each
sculpture for $2,700. If this is the case, will the sculptures' target cost be achieved without any value
engineering?
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