chapter 8. problem 8.10 Jiambalvo, J. (2016). Managerial Accounting: ebook (6th
ID: 2565947 • Letter: C
Question
chapter 8. problem 8.10
Jiambalvo, J. (2016). Managerial Accounting: ebook (6th ed.). Hoboken, NJ : John Wiley & Sons. (ISBN: 9781119158073)
PROBLEM 8-10. Target Costing [LO 2] Symphony Sound is designing a portable recording
studio to be sold to consumers. The team developing the product includes representatives from
marketing, engineering, and cost accounting. The recording studio will include sound-canceling
monitor headphones, audio recording and enhancement software, several instrumental and vocal
microphones, and portable folding acoustic panels. With this set of features, the team believes that
a price of $4,700 will be attractive in the marketplace. Symphony Sound seeks to earn a per unit
profit of 25 percent of selling price.
Required
a. Calculate the target cost per unit.
b. The team has estimated that the fixed production costs associated with the product will be
$1,800,000, and variable costs to produce and sell the item will be $2,900 per unit. In light of this,
how many units must be produced and sold to meet the target cost per unit?
c. Suppose the company decides that only 2,000 units can be sold at a price of $4,700 and, therefore,
the target cost cannot be reached. The company is considering dropping the folding acoustic
panels, which add $650 of variable cost per unit. With this feature dropped, the company believes
it can sell 2,600 units at $4,000 per unit. Will Symphony Sound be able to produce the item at the
new target cost or less?
a. Determine target cost per unit: Price $4,700 less desired profit Target cost per unit b. Total Fixed costs Variable costs/unit How many units must be made and sold to meet the above target cost per unit? (show formula used in cell or a note) c. With feature dropped, ($650 variable cost), plans to sell 2,600 units at $4,000/unit. Determine new target cost per unit: new Price less desired profit (25%) Target cost Variable costs/unit Fixed cost/unit Total Cost per unit Will the company will be able to produce the item at the new target cost or less?Explanation / Answer
a.
Determine target cost per unit:
Price
$4,700
less desired profit
$1,175
=25% X $4,700
Target cost per unit
$3,525
b.
Total Fixed costs
$1,800,000
Variable costs/unit
$2,900
How many units must be made and sold to meet the above target cost per unit?
(show formula used in cell or a note)
Total Target cost/unit= variable cost/unit + fixed cost/unit
Fixed cost/unit= ($3,525-$2,900) = $625
we are given total fixed cost as $1,800,000.
So, Number of units to be made and sold = $1,800,000/$625 = 2,880 units.
c.
With feature dropped, ($650 variable cost), plans to sell 2,600 units at $4,000/unit.
Determine new target cost per unit:
new Price
$4,000
less desired profit (25%)
$1,000
($4000 X 25%)
Target cost
$3,000
Variable costs/unit
$2,250
$2,900-$650
Fixed cost/unit
$692.30
$1,800,000/2,600 units
Total Cost per unit
$2,942.30
($2,250+$692.30)
Will the company will be able to produce the item at the new target cost or less?
From the above calculations, the company will be able to produce the item at less than the new target cost.
a.
Determine target cost per unit:
Price
$4,700
less desired profit
$1,175
=25% X $4,700
Target cost per unit
$3,525
b.
Total Fixed costs
$1,800,000
Variable costs/unit
$2,900
How many units must be made and sold to meet the above target cost per unit?
(show formula used in cell or a note)
Total Target cost/unit= variable cost/unit + fixed cost/unit
Fixed cost/unit= ($3,525-$2,900) = $625
we are given total fixed cost as $1,800,000.
So, Number of units to be made and sold = $1,800,000/$625 = 2,880 units.
c.
With feature dropped, ($650 variable cost), plans to sell 2,600 units at $4,000/unit.
Determine new target cost per unit:
new Price
$4,000
less desired profit (25%)
$1,000
($4000 X 25%)
Target cost
$3,000
Variable costs/unit
$2,250
$2,900-$650
Fixed cost/unit
$692.30
$1,800,000/2,600 units
Total Cost per unit
$2,942.30
($2,250+$692.30)
Will the company will be able to produce the item at the new target cost or less?
From the above calculations, the company will be able to produce the item at less than the new target cost.
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