( Target costing) The Products Development Division of Fast Foods has just completed its work on a new microwave entree. After consumer research was conducted, the marketing group has estimated the following quantities of the product can be sold at the following prices over its life cycle:

Initial engineering estimates of direct material and direct labor costs are $0.85 and $0.20, respectively, per unit. Variable overhead per unit is ex¬ pected to be $0.25, and fixed overhead is expected to be $100,000 per year. Fast Foods’ management strives to earn a 20 percent gross margin on prod¬ ucts of this type.

a. Estimate the target cost for the new entree.

b. Compare the estimated production cost to the target cost. Discuss this com¬ parison and how management might use the comparison to manage costs.

c.Based on your answer in part (b), should Fast Foods begin production of the new entree? Explain.

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Year Quantity Selling Price Year Quantity Selling Price 1234 100,000 250,000 $2.50 2.40 350,000 2.30 500,000 2.10 5698 600,000 $2.00 450,000 2.00 7 200,000 1.90 130,000 1.90