Following Larry's suggestion, Luis decided to use target costing to help improve new product profitability. Based on analyses by Luis and Doreen, the target prices for XKl and XK5 are $50 per pound and $35 per pound, respectively. Luis has indicated that any new product should earn a gross profit equal to 20% of sales. Based on this infor¬

mation, answer the following:

a. What is the target cost for each product? Given this information, what should be done?

b. Suppose the Doreen indicates that sales for each product can be increased by 50%

if the selling price is lowered by 10%. Assuming the same target profit (Luis wants the original target profit per pound maintained), calculate the new target costs. If all nonvalue-added costs were eliminated, could the target be met? (Calculate the unit cost at the 50,000 unit level.) Now calculate the effect on total profits under a scenario where nonvalue-added costs are not eliminated versus a scenario where all nonvalue-added costs are eliminated. (Include in this analysis any possible in¬

crease in sales volume.)