Case study 2 HEC Ltd manufactures two (2) products 'P' and 'Q' for the computer industry as follows: Product Annual production and sales Selling price per unit P 100,000 units $100.05 Q 50,000 units $150.00 Direct and indirect costs incurred on these two products are as follows: Particulars Q Total Direct material cost 4,200,000 3,000,000 7,200,000 Direct labour cost 1,500,000 1,000,000 2,500,000 Direct machining cost 700,000 550,000 1,250,000 Indirect costs Machine setup cost 462,000 Testing cost 2,375,000 Engineering cost 2,250,000 PP Case study 2 continued on next page --- --- Case study 2 continued --- Direct machining costs represents the cost of machine capacity dedicated to the production of each product. These costs are fixed and are not expected to vary over the long-term. Additional information: Particulars P Q Production batch size 1,000 units 500 units Set-up time per batch 30 hours 36 hours Testing time per unit 5 hours 9 hours Engineering cost $840,000 $1,410,000 A foreign competitor has introduced a product very similar to product P'. To maintain the company's market share and profitability, HEC Ltd will have to reduce the selling price of P' to $86.25. The company calls for a meeting and comes up with a proposal to change the design of product 'P'. The expected effect of new design is as follows: Direct material cost is expected to decrease by $5 per unit. Direct labour cost is expected to decrease by $2 per unit. Machine time is expected to decrease by 15 minutes, previously it took 3 hours to produce 1 unit of 'P'. Set-up time will be 28 hours for each set-up. Time required for testing each unit of 'P' will be reduced by 1 hour. Engineering cost and batch size will be unchanged. Assume cost per unit of cost drivers for the new design remains unchanged. Required (a) Calculate the full cost per unit of 'P' and 'Q' before the product 'P's redesign proposal was made. (b) Determine the current mark up on full cost per unit of 'P' based on your answer to requirement (a) above. Also, determine the target cost per unit for the redesigned product 'P' to maintain the same markup percentage on full cost per unit as it had earlier