1.

GW Motors is a specialist car manufacturer and intends to produce a new, limited edition Compact Executive car in 2022. The car will be named GW2022. The production will be limited to 1,000 units of GW2022.

GW Motors is keen to use a target costing approach and has conducted extensive market research to determine the features to be included in GW2022. Based on market research and knowledge of its competitors products, GW Motors has decided to price the GW2022 at USD 19,950. GW Motors requires an operating profit margin of 25% for GW2022. The company uses activity-based costing principles to assign overhead costs to units of production, and data available for the forthcoming year are as follows:

Estimated Direct Costs Per GW2022

Car Labour USD 5,000

Materials USD 9,500

Estimated Annual Overhead Costs

Production Line Costs USD 4,630,000 (Note 1)

Transportation Costs USD 1,800,000 (Note 2)

Note 1:

The production line that would be used for GW2022 has a capacity of 60,000 machine hours annually. The production line time required per GW2022 car is 6 machine hours. The same line will be used to manufacture other car models and will be working at full capacity.

Note 2:

Some car models manufactured by GW Motors are delivered to showrooms using car transporters. 40% of the transportation costs are driven by distance travelled.

For the coming year, GW Motors forecasts that 640 deliveries (each delivery carrying 10 cars) will be made by car transporters. It is assumed that every delivery will carry its maximum capacity of 10 cars.

The total annual distance travelled by car transporters is estimated to be 225,000 miles. Of which, 50,000 miles is expected for the delivery of GW2022 cars only. All 1,000 GW2022 that will be produced in the year is expected to be delivered in the year using car transporters.

Required:

1. Compute the target cost of a GW2022 car.
2. Determine if there is a current cost gap for GW2022 cars.
3. Advise GW Motors on their planned GW2022 launch.