1-Assuming the existing process technology is used , should the new product be r
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1-Assuming the existing process technology is used , should the new product be released to production ? WHY ?
Page Layout ReferencesMailings ReviewView Font Paragraph Ignore income taxes. Comment on the best alternative for Hawkeye Corporation 2:(5 Marks Bahrain Corporation uses target costing to aid in the final decision to release new products to production. A new product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique feature will generate a total demand of $50,000 units at an average price of $230. Design and production engineering departments have performed a value analysis of the product and have determined that the total cost for the various value-chain functions using the existing process technology are as follows: Value-Chain Function Research and development Design Manufacturing Marketing Distribution Customer Service Total Cost over Product Life Total cost over product life $1,500,0000 750,000 5,000,000 800,000 1,400,000 750,000 10,200,000 Management has a target profit percentage of20% ofsales. Production engineering indicates that new process technology can reduce the manufacturing cost by 40%, but it will cost $1,000,000.Explanation / Answer
1.
Expected demand = 50,000 units
Average selling price = $230
Total sales = 50,000 units x $230 = $11,500,000
Total costs when existing process technology is used = $10,200,000
Since, the total sales of the new product is higher than the total costs when the existing process technology is used, the new product should be released to production.
2.
Cost of new process technology = $1,000,000
Decrease in manufacturing costs when new process technology is used = $5,000,000 x 40% = $2,000,000
Net reduction in total costs = $2,000,000 - $1,000,000 = $1,000,000
Total costs if new process technology is used = $10,200,000 - $1,000,000 = $9,200,000
Total sales = $11,500,000
Since, the total sales of the new product is higher than the total costs when the new process technology is used, the new product should be released to production.
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