An electronics manufacturing company is planning to introduce a new product in t

Question

An electronics manufacturing company is planning to introduce a new product in the market. The best competitor sells a similar product at $420/unit. Other pertinent data are as follows: Production hours: 2.61 hours /unit Direct labor cost: $15.00/hour Factory overhead: 120% of direct labor Production materials: $300/unit Packing cost: 20% of direct labor The profit margin is based on the total manufacturing costs.

(a) using the information given, determine the maximum profit margin that the company can have so as to remain competitive.

(b) if the company desires a profit margin of 15%, can the target cost be achieved? If not, suggest two ways in which the target cost can be achieved.

Direct labor = ($15/hour)(2.61 hours/unit) = $39.15/unit

Factory overhead = (1.2)($39.15/unit) = $46.98/unit

Production material = $300/unit

Packing costs = (0.2)($39.15/unit) = $ 7.83/unit

_____________

Total manufacturing cost = $393.96/unit

Explanation / Answer

(b)

Target cost if the company desires a profit of 15% = $420*100/115 = $ 365.22

Actual manufacturing cost = $ 393.96

So the target cost cannot be achieved.

The following are the two ways through which the target can be achieved :

(i) Either it has to reduce the manufacturing cost                  (or)

(a) It has to purchase it for $ 365.22

The maximum profit margin that the company can have so has to remain competitive     = profit per unit / Manufacturing cost per unit

                        = $ 26.04*100/$393.96 = 6.61 % (Approx.)

Profit per unit if sale price is $ 420                      = $ 26.04 (i.e $420-$393.96)

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