Target pricing and target costing with ABC
Ingram Corporation manufactures two models of watches. Model Wonder displays cartoon characters and has simple features designed for kids. Model Marvel has sophisticated features such as dual time zones and an attached calculator. Ingram’s product design team has worked with a cost accountant to prepare a budget for the two products for the next fiscal year as follows.
$8 per unit
$20 per unit
$40/hour × 0.2 hour production time
$40/hour × 0.6 hour production time
Use of Cost Driver
Number of parts
W. 700,000; M. 520,000
Number of setups
W. 50; M. 40
Product testing Facility
Number of units tested
W. 1,000; M. 400
Number of machine hours
W. 3,200; M. 4,000
Wonder watches have 35 parts, and Marvel watches have 65 parts. The budget calls for producing 20,000 units of Wonder and 8,000 units of Marvel. Ingram tests 5 percent of its products for quality assurance. It sells all its products at market prices.
a. Compute the cost per unit for each product.
b. The current market price for products comparable to Wonder is $36 and for products comparable
to Marvel is $110. What will Ingram’s profit or loss for the next year be?
c. Ingram likes to have a 25 percent profit margin based on the current market price for each product.
What is the target cost for each product? What is the total target profit?
d. The president of Ingram has asked the design team to refine the production design to bring down the product cost. After a series of redesigns, the team recommends a new process that requires purchasing a new machine that costs $400,000 and has five years of useful life and no salvage value. With the new process and the new machine, Ingram can decrease the number of machine setups to four for each product and cut the cost of materials handling in half. The machine hours used will be 4,500 for Wonder and 6,500 for Marvel. Does this new process enable Ingram to achieve its target costs?