Royal Bath, Inc. is considering the production of a new bathroom vent system. th

Question

Royal Bath, Inc. is considering the production of a new bathroom vent system. the Marketing Department has determined that there would be demand for the product at or below a selling price of $175 per unit. Anticipated unit costs are as follows:
Direct materials $28
Direct labor costs:
Manufacturing:
Hours 2.2
Hourly rate $12
Assembly:
Hours 2.5
Hourly rate $10
Machine hours 2
Royal uses the following activity based costs: Materials handling 120% of direct material Production $8 per machine hour Shipping and handling $10 per unit the company's desired profit is 25% over total production and shipping costs.
Calculate the target cost for this product and determine whether or not it should be produced
Target cost: __________
Should it be produced?: ____________

Explanation / Answer

Target Cost is $ 87.6

It should not be produce because target cost is higher.

Working as below

At target Cost material Cost Per unit 28 material handling 33.6 Machine Hour Cost (8*2) 16 Shipping & handing Cost 10 Target Cost 87.6 Profit 21.9 Selling Price 109.5 Anticipated Cost Direct material 28 Labour Cost manufactruing 26.4 Assembly 25 Total Cost 79.4 Sale Price 175 Profit 95.6

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