(A) Tech-cam Limited has been manufacturing electronic-cam-dashboards for many years. Due to technological advancement and intense competition, product lifecycles are short and the industry is characterised by stiff competition.

Currently, Tech-cam's research and development is conducting some design works on a new type of dashboard. It has been estimated that the total research and development cost for this new product can be $180,000. When mass production and sales occur, it is estimated that manufacturing cost will be $25 per unit and management has decided on the selling price of $58.50 per unit. It has also been estimated that a total of 12,000 units can be sold before demand for the product ceases. At the end of this, Tech-cam will incur $90,000 end-of-life costs to dismantle and remove the production facilities used to manufacture the dashboards.

Target costing and lifecycle costing are used in Tech-cam to manage its product portfolio. All new products are required to have a mark-up of 30%.

Required:

(a) Calculate the target cost and lifecycle cost per unit of the dashboard. Based on your calculation, justify whether or not Tech-cam should manufacture the new dashboard.

(8 marks)

(b) If Tech-cam increases its research and development expenditure on the new dashboard by 15%, it can achieve a 42% reduction in the end-of-life costs together with an unspecified reduction in the manufacturing cost per unit. Estimated sales quantity and selling price per unit will remain unchanged. What size of reduction in the manufacturing cost per unit will enable Tech-cam to achieve the required mark-up? Show your workings and calculations.

(8 marks)

(c) Tech-cam has asked you to illustrate how the changes in (b) might occur in practice. Recommend and justify one example of how a design change can bring about the cost savings as shown in (b).

(9 marks)

5

(B) Because of intense competition in the industry, Tech-cam wants to improve on its product quality. It is thus important for the company to build up a total quality management culture throughout the company and management has instructed its cost accountant to collect and provide the following actual information for the first quarter of the current year:

Equipment testing cost per hour $20

Warranty repair cost per dashboard $15

Manufacturing rework cost per dashboard $8

Customer support centre cost per hour $45

Dashboards requiring manufacturing rework 620

Dashboards requiring warranty repair 440

Customer support centre time 350 hours

Production line equipment testing time 360 hours

Tech-cam has completed a quality review of its existing suppliers for the recent quarter at a cost of $50,000.

Due to quality issues in the quarter, the production lines have experienced unproductive down-time costing $65,000.

Required:

(d) Cost of Quality report based on the above information using the four recognised quality cost headings.

(15 marks)

(e) Give ten reasons why a Cost of Quality report can support the development of a total quality culture (TQM) at Tech-cam.

(10 marks)

(8 + 8 + 9 + 15 + 10 = 50)