Refer to the information in and format of Exhibit 5—2. PMI is considering producing one product that is similar to the MegaBurger novelty toys but for another customer. This product will be larger and more complex than the MegaBurger products, and it will be sold in retail toy stores throughout the world. The product will be shipped to the customer immediately upon completion. The estimates for this new product follow. PMI’s cost of capital recently increased significantly, resulting in a return on sales requirement of 25 percent for all new business.

Number of units per month Sales price per unit Product life 1. — Unit-level costs 1.1. | Acquire and use materials 2. Batch-level costs 2.1. Setup and quality control for manually controlled machines 3. Product-level costs 3.1. Design and manufacture molds 3.2. | Use manually controlled injectionmolding machines 4. Customer-level costs 4 Consult with customer 4.2 Provide warehousing for customer 5. Facility-level costs Srl Manage workers Owe Use building space Required Problem 5.43 Activity-Based and Target Costing

(LO 2)

15,000

$19.00 3 years 15,000 units per month; $9 per unit 12 batches per month; $800 per batch 2 molds for the 1 product (to last 3 years);

$3,000 per mold per month

$40,000 per month 15 consultations per month; $150 per consultation None

$2,000 per month

$14,000 per month

a. Calculate the dollar and percentage target-cost reduction for the three-year life of the new product.

b. As the manager responsible for making the decision, would you recommend that the company produce this new product for its customer? Explain.