A mobile phone company launches a new model. The best competitor offers a similar phone at $500 per unit. Other pertinent data are as follows:
Directory labor cost: ........................... $20.00/hour
Factory overhead: .............................. 120% of direct labor
Production materials: .......................... $200/unit
Packaging costs: .............................. 25% of direct labor
A 90% learning curve applies to the labor required and it will take 8 hours to complete the first unit. The company decides to use the time required to complete the 25th unit as a standard for cost estimation purposes. The profit margin is based on 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 % suggest two ways in which the target cost can be achieved.