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Calculate the lifetime cost per unit and, through the use of target costing, identify any cost gap. Advise whether the production should go ahead based on the current costs

Calculate the lifetime cost per unit and, through the use of target costing, identify any cost gap. Advise whether the production should go ahead based on the current costs

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Grunge Limited is introducing a new product to the market which is expected to have a life cycle of 3 years. It has forecast sales in the first year to be 20,000 units which will rise to 25,000 in the second year and fall to 5,000 in the third year. The proposed selling price is £85 per unit with variable costs of £30 per unit. Other lifetime costs are: Design cost Further development expenditure £350,000 Production overheads £800,000 £500,000 Non production overheads £400,000 A mark up of 35% is required on all new products to consider them viable. Required: Calculate the lifetime cost per unit and, through the use of target costing, identify any cost gap. Advise whether the production should go ahead based on the current costs
Transcribed Image Text:Grunge Limited is introducing a new product to the market which is expected to have a life cycle of 3 years. It has forecast sales in the first year to be 20,000 units which will rise to 25,000 in the second year and fall to 5,000 in the third year. The proposed selling price is £85 per unit with variable costs of £30 per unit. Other lifetime costs are: Design cost Further development expenditure £350,000 Production overheads £800,000 £500,000 Non production overheads £400,000 A mark up of 35% is required on all new products to consider them viable. Required: Calculate the lifetime cost per unit and, through the use of target costing, identify any cost gap. Advise whether the production should go ahead based on the current costs
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