Top-D Limited is an established company designing and manufacturing adjustable tables and work desks. It has been in the industry for more than 20 years and is wellknown for its innovative and stylish products. The company is staffed with more than 100 experienced designers, has a total of 3 manufacturing facilities and a network of retail outlets spread across South-east Asia.

The manufacturing plants purchase the materials and parts needed for their production from several suppliers who will deliver to their warehouses until the materials are needed for production. The three manufacturing plants produce most of the tables and desks demanded by customers in their respective regions. They have their own fleet of delivery vehicles and conduct their own deliveries. The finished goods are delivered to the retail outlets each week following the same schedule regardless of the load carried by the vehicles.

Top-D is financially strong and has accumulated sufficient cash flow in recent years. Hence the company has no problem in seeking additional funds from lending institutions if the need arises. Recently Top-D formed a strategic alliance with an award-winning design house called Design Studio Pte Ltd to produce a unique and stylish adjustable table targeted at consumers such as art practitioners, musicians and designers who sometimes prefer to stand up while doing their works.

At the press of a button on the side-border of the table, the table height can be lifted or lowered. Top-D will be responsible for all parts of the table including assembly while Design Studio will design and produce an automatic component for lifting and lowering the height of the table. The automatic component is a compact piece of electronics enclosed in a beautiful case the size of a small match-box of 2-by-3 cm. Top-D agrees to purchase this component for $335 each from Design Studio. Each table requires one such component

Top-D intends to sell this adjustable table for $1,199 in the retail market. The company’s marketing team has done a study and reported that the product will compete against two similar products selling for $999 and $1299 respectively. Before launching the product, the management accountant and his team want to use target costing to gauge the feasibility of retailing the product at $1,199. The company’s targeted profit is 25% at $1,199. The management accountant has provided the following forecast:

Materials for table mainframe $245.50

Materials for other parts of table $72.48

Automatic mechanisms $8

Labour (0.65 hours at $65 per hour) $42.25

For manufacturing overheads, Top-D wants to add 15% to the total of all material costs needed in the manufacturing process. For marketing, selling and administrative costs, Top-D will add $46.50 to each product. The company’s production engineer expected that for materials for other parts of table, the yield from the materials is only 96%. That is, 4% of the materials will be lost in the manufacturing process. The forecasted materials for other parts of table stated above did not include this wastage

Required:

(a) What is the cost gap per table between the target and the forecast? Show all necessary workings. (22 marks)

(b) Looking at the activities in the value chain of the company, explain what can be done to reduce the cost gap. You need to use the information given in the question. (20 marks)

(c) How can Top-D gain from using target costing? Provide an example of how target costing can be used and an example of the challenge that can come with adopting it. (8 marks)