LO.4 & LO.5 (Target costing) The marketing department at Cleveland Furniture Mfg. has an idea for a new product that is expected to have a 6-year life cycle. After conduct- ing market research, the company found that the product could sell for $800 per unit in the first 4 years of life and for $650 per unit for the last 2 years. Unit sales are expected to be as follows: Year 1 4,000 Year 2 3,600 Year 3 4,700 Year 4 5,000 Year 5 1,500 Year 6 1,000 Per-unit variable selling costs are estimated at $140 throughout the product's life; total fixed selling and administrative costs over the 6 years are expected to be $3,700,000. Cleveland Furniture Mfg. desires a profit margin of 15 percent of selling price per unit. a. Compute the life cycle target cost to manufacture the product. (Round to the near- est cent.) b. If the company expects the product to cost $430 to manufacture in the first year, what is the upper bound for manufacturing cost in the following five years? (Round to the nearest cent.) c. Refer to the original information. Assume that Cleveland Furniture Mfg. engineers indicate that the expected manufacturing cost per unit is $340. What actions might the company take to reduce this cost?

LO.4 & LO.5 (Target costing) The marketing department at Cleveland Furniture Mfg. has an idea for a new product that is expected to have a 6-year life cycle. After conduct- ing market research, the company found that the product could sell for $800 per unit in the first 4 years of life and for $650 per unit for the last 2 years. Unit sales are expected to be as follows: Year 1 4,000 Year 2 3,600 Year 3 4,700 Year 4 5,000 Year 5 1,500 Year 6 1,000 Per-unit variable selling costs are estimated at $140 throughout the product's life; total fixed selling and administrative costs over the 6 years are expected to be $3,700,000. Cleveland Furniture Mfg. desires a profit margin of 15 percent of selling price per unit. a. Compute the life cycle target cost to manufacture the product. (Round to the near- est cent.) b. If the company expects the product to cost $430 to manufacture in the first year, what is the upper bound for manufacturing cost in the following five years? (Round to the nearest cent.) c. Refer to the original information. Assume that Cleveland Furniture Mfg. engineers indicate that the expected manufacturing cost per unit is $340. What actions might the company take to reduce this cost?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 25E

See similar textbooks

Related questions

Q: Derby Phones is considering the introduction of a new model of headphones with the following price…

A: As more than one subquestions are asked I am providing the answer for first three requirements.

Q: A producer of microwave ovens has adopted an experience curve pricing approach for its new model.…

A: As per the learning curve or experience curve theory, the cost of producing an item reduces as and…

Q: Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is…

A: When determining the cost of a product using target costing, a targeted profit margin is subtracted…

Q: Cabin Creek Company is considering adding a new line of kitchen cabinets. The company's accountant…

A: It is the process of making decisions that involve the management of costs to achieve long-term…

Q: ETS manufactures a component for its computer products. The annual demand for this component is 2500…

A: Note: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question…

Q: Nivea Company is planning to introduce a new product. Market research information suggests that the…

A: Introduction: A product is a tangible thing that is placed on the market for acquisition,…

Q: Target costing The marketing department at Cleveland Furniture Mfg. has an idea for a new product…

A: Life Cycle Cost (LCC) encompasses the complete expenses linked to a product or system during its…

Q: After conducting a market research study, Magnificent Manufacturing decided to produce a new…

A: After conducting a market research study, Magnificent Manufacturing decided to produce a new…

Q: Required: 1. What is the annual financial advantage (disadvantage) of adding the new line of kitchen…

A: Contribution margin refers to the difference between total sales revenue and variable costs. It…

Q: .. Annual Demand is 450 units. The cost to place an order is $80 and holding cost is 25% per year of…

Q: 8/Nivea Company is planning to introduce a new product. Market research information suggests that…

A: Life cycle costing accounts for all costs incurred throughout a product's life cycle. When life…

Q: Star Company's manager, Tom, is thinking about production of a new product. Tom is considering three…

A: It has been given in the question that only that product is to be chosen in which there is a highest…

Q: Calculate the number of helmets Head-First must sell to earn operating income of $81,900.…

A: In this numerical has covered the concept of Cost - Volume-Profit Analysis and Contribution Margin…

Q: Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is…

A: A target cost is the cost that is incurred on a product which is the maximum cost but can earn the…

Q: Derby Phones is considering the introduction of a new model of headphones with the following price…

A: (a) Operating profit = Sales - variable cost - fixed cost = (7,000 x 18) - (7,000 x 7) -…

Q: The Caplow Company, a chair manufacturing shop decides to use target profit pricing to establish a…

A: Target profit pricing is the setting up of a target price which can be computed by estimating the…

Q: OA. $940,0 OB. $200,0 OC. $250,0 OD. $490,

A: Target full product cost is the total cost required to produce and deliver a product or service…

Q: Rusty Company is considering developing a new product. The company has gathered the following…

A: The markup value is the amount which is added to the cost inorder to set the selling price and to…

Q: Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is…

A: In the given question, Target cost is achieved by deducting gross margin from estimated market…

Q: ABC has developed a new kitchen utensil. The firm has conducted significant market research and…

A: >Target cost is the cost of the product that has been determined by analysing the difference…

Q: t it estimates will sell for $95 per unit. Annual demand is estimated to be 98,000 units. Sonora…

A: Target costing is a way of calculating a product's life-cycle cost, which should be sufficient to…

Q: A company is planning a new product. Market research information suggests that the product should…

A: Given : Units to be sold 20000 units profit margin expected 20% of sales Research and development…

Q: Q.1 ChemCo has developed a new product, and has consulted with its marketing department, who have…

A: Profitability ratios measure the operational efficiency of an entity as these represent the final…

Q: Utah Utensil has developed a new kitchen utensil. The firm has conducted significant market research…

A: Formula: Fixed cost per unit = Total expected average cost / Number of units Division of total…

Question

LO.4 & LO.5 (Target costing) The marketing department at Cleveland Furniture Mfg.
has an idea for a new product that is expected to have a 6-year life cycle. After conduct-
ing market research, the company found that the product could sell for $800 per unit in
the first 4 years of life and for $650 per unit for the last 2 years. Unit sales are expected
to be as follows:
Year 1
4,000
Year 2
3,600
Year 3
4,700
Year 4
5,000
Year 5
1,500
Year 6
1,000
Per-unit variable selling costs are estimated at $140 throughout the product's life; total
fixed selling and administrative costs over the 6 years are expected to be $3,700,000.
Cleveland Furniture Mfg. desires a profit margin of 15 percent of selling price per unit.
a. Compute the life cycle target cost to manufacture the product. (Round to the near-
est cent.)
b. If the company expects the product to cost $430 to manufacture in the first year,
what is the upper bound for manufacturing cost in the following five years? (Round
to the nearest cent.)
c. Refer to the original information. Assume that Cleveland Furniture Mfg. engineers
indicate that the expected manufacturing cost per unit is $340. What actions might
the company take to reduce this cost?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1 Calculation of life cycle Revenue

VIEW

Step 2 Calculation of Variable Cost

VIEW

Step 3 - Answer to part a) calculation of life cycle Target cost

VIEW

Step 4 Answer to part B - Computation of manufacturing cost for remaining 5 years

VIEW

Step 5 Answer to part C

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 5 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:
Schylar Pharmaceuticals, Inc., plans to sell 130,000 units of antibiotic at an average price of 22 each in the coming year. Total variable costs equal 1,086,800. Total fixed costs equal 8,000,000. (Round all ratios to four significant digits, and round all dollar amounts to the nearest dollar.) Required: 1. What is the contribution margin per unit? What is the contribution margin ratio? 2. Calculate the sales revenue needed to break even. 3. Calculate the sales revenue needed to achieve a target profit of 245,000. 4. What if the average price per unit increased to 23.50? Recalculate: a. Contribution margin per unit b. Contribution margin ratio (rounded to four decimal places) c. Sales revenue needed to break even d. Sales revenue needed to achieve a target profit of 245,000
Nico Parts, Inc., produces electronic products with short life cycles (of less than two years). Development has to be rapid, and the profitability of the products is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that post-purchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was 130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be 120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, Cathy McCourt. The following conversation was recorded: BRIAN: Mark, as you know, we agreed that a profit of 15 per unit is needed for this new product. Also, as I look at the projected market share, 25 percent isnt acceptable. Total profits need to be increased. Cathy, what suggestions do you have? CATHY: Simple. Decrease the selling price to 125 and we expand our market share to 35 percent. To increase total profits, however, we need some cost reductions as well. BRIAN: Youre right. However, keep in mind that I do not want to earn a profit that is less than 15 per unit. MARK: Does that 15 per unit factor in preproduction costs? You know we have already spent 100,000 on developing this product. To lower costs will require more expenditure on development. BRIAN: Good point. No, the projected cost of 120 does not include the 100,000 we have already spent. I do want a design that will provide a 15-per-unit profit, including consideration of preproduction costs. CATHY: I might mention that post-purchase costs are important as well. The current design will impose about 10 per unit for using, maintaining, and disposing our product. Thats about the same as our competitors. If we can reduce that cost to about 5 per unit by designing a better product, we could probably capture about 50 percent of the market. I have just completed a marketing survey at Marks request and have found out that the current design has two features not valued by potential customers. These two features have a projected cost of 6 per unit. However, the price consumers are willing to pay for the product is the same with or without the features. Required: 1. Calculate the target cost associated with the initial 25 percent market share. Does the initial design meet this target? Now calculate the total life-cycle profit that the current (initial) design offers (including preproduction costs). 2. Assume that the two features that are apparently not valued by consumers will be eliminated. Also assume that the selling price is lowered to 125. a. Calculate the target cost for the 125 price and 35 percent market share. b. How much more cost reduction is needed? c. What are the total life-cycle profits now projected for the new product? d. Describe the three general approaches that Nico can take to reduce the projected cost to this new target. Of the three approaches, which is likely to produce the most reduction? 3. Suppose that the Engineering Department has two new designs: Design A and Design B. Both designs eliminate the two nonvalued features. Both designs also reduce production and logistics costs by an additional 8 per unit. Design A, however, leaves post-purchase costs at 10 per unit, while Design B reduces post-purchase costs to 4 per unit. Developing and testing Design A costs an additional 150,000, while Design B costs an additional 300,000. Assuming a price of 125, calculate the total life-cycle profits under each design. Which would you choose? Explain. What if the design you chose cost an additional 500,000 instead of 150,000 or 300,000? Would this have changed your decision? 4. Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? What does this say about the importance of knowing the linkages between preproduction activities and later activities?
Rusty Company is considering developing a new product. The company has gathered the following information on this product: Expected total unit cost $20 Estimated investment for new product $700,000 Desired ROI 5% Expected number of units to be produced and sold 1,000 The desired markup percentage is: A) 275%. C) 175% B) 75%. D) 100%
A company is planning a new product. Market research information suggests that the product should sell 20,000 units at $35.00/unit. The company seeks to make a margin of 20% on sales. It is estimated that the lifetime costs of the product will be as follows: a. Research and development costs $60,000 b. Manufacturing costs $25/unit c. Decommissioning Costs $40,000 What is the Target Cost per unit? What is the original lifecycle cost per unit?
Maverick Enterprises is planning a new product. Annual sales, unit costs, and unit revenues are as tabulated; the first cost of R&D and setting up the assembly line is $42,000. If i is 10%, what is the PW?
Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new product with the following estimates: Estimated market price $ 1,500 Annual demand 86,000 units Life cycle 7 years Target profit 26 % return on sales Required: 1. Compute the target cost of this product. 2. Compute the target cost if Majesty wants a 36 percent return on sales. 3. Compute the target cost if Majesty wants a 7 percent return on sales.
A product has a daily demand 60 unitsOrdering cost RO 200, and holding cost RO 3 per unit per year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost per year in total annual inventory (holding and ordering) costs. Assume there a total of 250 workdays per yearRound-up to the nearest integer
Majesty Company uses target costing to ensure that its products are profitable. Assume Majesty is planning to introduce a new product with the following estimates. Estimated market price Annual demand Life cycle Target profit $ 1,900 84,000 units 1. Target Cost 2. Target Cost 3. Target Cost 5 years 22 percentage return on sales Required: 1. Compute the target cost of this product. 2. Compute the target cost if Majesty wants a 44 percent return on sales. 3. Compute the target cost if Majesty wants a 12 percent return on sales.
8/Nivea Company is planning to introduce a new product. Market research information suggests that the product should sell 1000 units at OMR 225 per unit. The company seeks to make a mark-up of 45% product cost. It is estimated that the lifetime costs of the product will be as follows: 1. Design and development costs OMR 22000 2. Manufacturing costs OMR 150 per unit 3. End of life costs OMR 3000 By analyzing the life cycle cost of the product, do you recommend the company to produce the new product? a. No, the product generate profit by producing this product b. Yes, the product cannot generate profit by producing this product c. Yes, the product generate profit by producing this product d. No, the product cannot generate profit by producing this product
Please answer all questions. Thank you!
Utah Utensil has developed a new kitchen utensil. The firm has conducted significant market research and estimated the following pattern for sales of the new product: Year Expected Volume (Units) Expected Price per Unit 1 41,280 $19 2 48,000 20 3 90,000 16 4 34,400 12 The firm wants to net a minimum of $3.50 per unit in profit over the product’s life, and selling and administrative expenses are expected to average $43,000 per year. Calculate the life cycle target cost per unit to produce the new utensil. Note: Round your answer to two decimal places (i.e., round 2.4555 to 2.46). $