Management at Pew Co. is considering the development of an automated machine called the AutoMate. After conferring with the design engineers, the controller's staff assembled the following data about this product:
Target selling price........................................................ $500 per unit
Desired profit percentage...................................... 50% of total unit cost
Projected unit demand...................................................... 5,000 units
Activity-based cost rates:
Materials handling .................1% of direct materials and purchased parts cost
Engineering ..................................................................$20 per unit
Production and assembly........................................ $10 per machine hour
Delivery ........................................................................$7 per unit
Marketing....................................................................... $4 per unit
Per-unit data:
Direct materials cost............................................................... $160
Purchased parts cost................................................................. $40
Manufacturing labor:
Hours..................................................................................... 2
Hourly labor rate ......................................................................$15
Assembly labor:
Hours..................................................................................... 3
Hourly labor rate..................................................................... $10
Machine hours........................................................................... 4
1. Compute the product's target cost.
2. Compute the product's projected unit cost based on the design engineers' estimates.
3. Should management produce and market the Auto- Mate? Defend your answer.