Refer to the information in and format of Exhibit S—2. PMI is considering producing one product similar to the MegaBurger novelty toys but for another customer. It will ship the product to the customer immediately upon completion. The estimates for this new product follow. Assume that PMI can add capacity as needed at costs comparable to those in Exhibit 5-2. PMI requires a 20 percent return on sales for new business.

Number of units per month 18,000 Sales price per unit $18.00 Product life 3 years 1. Unit-level costs len Acquire and use materials 2. Batch-level costs eal Set up manually controlled machines 3. Product-level costs 3.1 Design and manufacture molds 18,000 units per month; $12 per unit 12 batches per month; $600 per batch 2 molds for the 1 product (to last 3 years);

$4,000 per mold per month 3.2 Use manually controlled injection- $40,000 per month molding machines 4. Customer-level costs 4A Consult with customers 4.2 Provide warehousing for customers 5. Facility-level costs 20 consultations per month, $200 each None Syl Manage workers 5.2 Use building space Required a.

b.

Cc.

$4,000 per month

$12,000 per month Calculate the dollar and percentage target-cost reduction for the three-year life of the new product.

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