Chapter 13, Problem 13.27P

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 antiaging 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	$1,700,000
Direct materials	4,000,000
Direct manufacturing labor	1,600,000
Variable manufacturing overhead	400,000
Fixed manufacturing overhead	2,500,000
Fixed marketing	3,000,000

1. 1. The company believes that it can successfully sell the product for $45 a bottle. The company’s target operating income is 30% of revenue. Calculate the target full cost of producing the 400,000 units. Does the cost estimate meet the company’s requirements? Is value engineering needed? Required
2. 2. 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?
3. 3. The company president does not believe that the formula should be altered for fear it will tarnish the company’s brand. She prefers that the company become more efficient in manufacturing the product. If fixed manufacturing costs can be reduced by $250,000 and variable direct manufacturing labor costs are reduced by $1 per unit, will Westerly achieve its target cost?
4. 4. Would you recommend the company follow the proposed solution in requirement 2 or requirement 3?