A component of the direct materials cost requires the nectar of a specific plant in South America. If the company could eliminate this special ingredient, the materials cost would decrease by 25%. However, this would require design changes of $300,000 to engineer a chemical equivalent of the ingredient. Will this design change allow the product to meet its target cost? Value engineering, target pricing, and target costs. Westerly Cosmetics manufactures and sellsa variety of makeup and beauty products. The company has developed its own patented formula for a newanti-aging cream The company president wants to make sure the product is priced competitively becauseits purchase will also likely increase sales of other products. The company anticipates that it will sell400,000 units of the product in the first year with the following estimated costs:Product design and licensingDirect materialsDirect manufacturing laborVariable manufacturing overheadFixed manufacturing overheadFixed marketing$1,700,0004,000,0001,600,000400,0002,500,0003,000,000

Target cost: In a competitive market, companies cannot set prices because the supply and demand…

Answered: Value engineering, target pricing, and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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A component of the direct materials cost requires the nectar of a specific plant in South America. If the company could eliminate this special ingredient, the materials cost would decrease by 25%. However, this would require design changes of $300,000 to engineer a chemical equivalent of the ingredient. Will this design change allow the product to meet its target cost?

Value engineering, target pricing, and target costs. Westerly Cosmetics manufactures and sells
a variety of makeup and beauty products. The company has developed its own patented formula for a new
anti-aging cream The company president wants to make sure the product is priced competitively because
its purchase will also likely increase sales of other products. The company anticipates that it will sell
400,000 units of the product in the first year with the following estimated costs:
Product design and licensing
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Fixed marketing
$1,700,000
4,000,000
1,600,000
400,000
2,500,000
3,000,000

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