Pacific Decor, Inc., designs, manufactures, and sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of the past month working on the design of a high-end dining room table. The design has been well-received by Jose Alvarez, the product development manager. However, Alvarez wants to make sure that the table can be priced competitively. Amy Hoover, Pacific's cost accountant, presents Alvarez with the following cost data for the expected production of 200 tables: Design cost $ 5,000 Direct materials 120,000 Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead 142,000 64,000 46,500 Marketing 15,000 1. Alvarez thinks that Pacific can successfully market the table for $2,000. The company's target operating income is 10% of revenue. Calculate the target full cost of producing the 200 tables. Does the cost estimate developed by Hoover meet Pacific's requirements? Is value engineering needed? 2. Alvarez discovers that Li has designed the table two inches wider than the standard size of wood normally used by Pacific. Reducing the table's size by two inches will lower the cost of direct materials by 40%. However, the redesign will require an additional $6,000 of design cost, and the table will be sold for $1,950. Will this design change allow the table to meet its target cost? Are the costs of materials a locked-in cost? 3. Li insists that the two inches are an absolute necessity in terms of the table's design. She believes that spending an additional $7,000 on better marketing will allow Pacific to sell the tables for $2,200. If this is the case, will the table's target cost be achieved without any value engineering? 4. Compare the total operating income on the 200 tables for requirements 2 and 3. What do you recommend Pacific do, based solely on your calculations? Explain briefly.
Pacific Decor, Inc., designs, manufactures, and sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of the past month working on the design of a high-end dining room table. The design has been well-received by Jose Alvarez, the product development manager. However, Alvarez wants to make sure that the table can be priced competitively. Amy Hoover, Pacific's cost accountant, presents Alvarez with the following cost data for the expected production of 200 tables: Design cost $ 5,000 Direct materials 120,000 Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead 142,000 64,000 46,500 Marketing 15,000 1. Alvarez thinks that Pacific can successfully market the table for $2,000. The company's target operating income is 10% of revenue. Calculate the target full cost of producing the 200 tables. Does the cost estimate developed by Hoover meet Pacific's requirements? Is value engineering needed? 2. Alvarez discovers that Li has designed the table two inches wider than the standard size of wood normally used by Pacific. Reducing the table's size by two inches will lower the cost of direct materials by 40%. However, the redesign will require an additional $6,000 of design cost, and the table will be sold for $1,950. Will this design change allow the table to meet its target cost? Are the costs of materials a locked-in cost? 3. Li insists that the two inches are an absolute necessity in terms of the table's design. She believes that spending an additional $7,000 on better marketing will allow Pacific to sell the tables for $2,200. If this is the case, will the table's target cost be achieved without any value engineering? 4. Compare the total operating income on the 200 tables for requirements 2 and 3. What do you recommend Pacific do, based solely on your calculations? Explain briefly.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Pacific Decor, Inc., designs, manufactures, and sells contemporary wood furniture. Ling Li is
a furniture designer for Pacific. Li has spent much of the past month working on the design
of a high-end dining room table. The design has been well-received by
Jose Alvarez, the product development manager. However, Alvarez wants to make sure that
the table can be priced competitively. Amy Hoover, Pacific's cost accountant, presents
Alvarez with the following cost data for the expected production of 200 tables:
Design cost
$ 5,000
Direct materials
120,000
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
142,000
64,000
46,500
Marketing
15,000
1. Alvarez thinks that Pacific can successfully market the table for $2,000. The
company's target operating income is 10% of revenue. Calculate the target full cost
of producing the 200 tables. Does the cost estimate developed by Hoover meet
Pacific's requirements? Is value engineering needed?
2. Alvarez discovers that Li has designed the table two inches wider than the standard
size of wood normally used by Pacific. Reducing the table's size by two inches will
lower the cost of direct materials by 40%. However, the redesign will require an
additional $6,000 of design cost, and the table will be sold for $1,950. Will this design
change allow the table to meet its target cost? Are the costs of materials a locked-in
cost?
3. Li insists that the two inches are an absolute necessity in terms of the table's design.
She believes that spending an additional $7,000 on better marketing will allow
Pacific to sell the tables for $2,200. If this is the case, will the table's target cost be
achieved without any value engineering?
4. Compare the total operating income on the 200 tables for requirements 2 and 3.
What do you recommend Pacific do, based solely on your calculations? Explain
briefly.
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