Target Costing And Pricing Exercise 8 Lovebug Company

Target Costing And Pricingexercise 8lovebug Company Has Determined Th

Target Costing and Pricing Exercise 8: Lovebug Company has determined that the new automotive hood screen could be priced at or under $30 to gain widespread customer acceptance. The anticipated direct materials cost is $5. The manufacturing labor involves 0.2 hours at $10/hour, and assembly labor involves 0.5 hours at $15/hour. Machine hours per unit are 1. The company uses activity-based costing with rates for machine handling ($0.30 per dollar of direct materials), production ($5.00 per machine hour), and product delivery ($0.50 per unit). Their minimum desired profit margin is 40% over total production and delivery costs. The task is to compute the target cost for the hood screen and evaluate whether the company should market it, based on the specified price constraint.

Paper For Above instruction

Developing a product that balances cost, pricing, and profit margins is essential for competitive range and overall profitability. Target costing is a strategic pricing and cost management approach aimed at designing a product that meets customer expectations while ensuring desired profit margins. This exercise involves calculating the target cost for the automotive hood screen, considering product costs and the company's profit objectives, then assessing market viability under the constraint of a maximum selling price of $30.

First, understanding the cost structure is vital. The direct material cost for the hood screen is straightforward at $5 per unit. The direct labor comprises two components: manufacturing labor and assembly labor. Manufacturing labor costs are calculated as 0.2 hours at $10 per hour, totaling $2 per unit. Assembly labor involves 0.5 hours at $15 per hour, totaling $7.50 per unit. Summing these yields a total direct labor cost of $9.50 per unit.

The anticipated machine hours per unit are one, with an associated activity-based rate of $5.00 per machine hour, adding $5 to the production cost. Thus, the total direct costs before considering activity-based activities are:

• Materials: $5.00
• Manufacturing labor: $2.00
• Assembly labor: $7.50
• Machine operation: $5.00

The sum of these direct costs equals $19.50. Next, activity-based costing allocates additional costs using the specified rates:

• Machine handling: For each dollar of direct materials ($5), cost is $0.30, totaling $1.50.
• Production: Given machine hours of 1 at $5.00 per hour, activities cost $5.00.
• Product delivery: $0.50 per unit, adding $0.50.

Therefore, the total activity-based costs are: $1.50 + $5.00 + $0.50 = $7.00.

The total estimated cost per unit before profit markup is then $19.50 + $7.00 = $26.50.

The company's desired profit is 40% over the total production and delivery costs. Calculating the target selling price backward involves dividing the target price by (1 + profit margin):

Target price = Cost / (1 - Desired profit margin) = $26.50 / (1 - 0.40) = $26.50 / 0.60 ≈ $44.17

Since the maximum acceptable price for the product is $30, and the target price considering cost and desired profit margins is approximately $44.17, the product would not be viable to market at this price point. To meet the market price constraint of $30, the total allowable target cost must be calculated as:

Target cost = $30 / (1 + 0.40) = $30 / 1.40 ≈ $21.43

Comparing this target cost to the computed estimated cost of $26.50 reveals that the costs exceed the allowable target cost by approximately $5.07. This indicates that either the product design must be adjusted to reduce costs to approximately $21.43 or the company must consider increasing the selling price (which conflicts with the under-$30 constraint) or accepting lower profit margins.

Given the current cost structure, the company faces significant challenges in marketing the hood screen under the specified financial constraints. Strategic measures such as redesigning the product for cost reduction, negotiating lower material or labor costs, or opting for more efficient manufacturing processes could be necessary to align costs with the target market price. Alternatively, identifying features or value propositions that justify higher pricing could imply extending the product’s price point above $30 if market analysis permits.

Conclusion

Under the current cost estimates and activity-based costing allocations, the target cost to sell the hood screen at or below $30 appears unfeasible without significant cost reductions. As such, the company should reconsider either product design, cost management, or price positioning strategies. Pursuing cost engineering, process improvements, or alternative materials may bridge the cost gap, enabling the product to be marketed profitably at the desired price point.

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