Deluxe Doll Manufacturing produces several different types of dolls. Product demand escalates during the holiday season in December. In the past, the company filled customer orders by anticipating demand increases and then manufacturing inventories in advance.

Recently, competition from other toymakers has escalated. Deluxe needs to reduce prices and, therefore, cut costs. The current cost for Deluxes best seller, Bouncy Baby Doll, is $12. To be competitive, the marketing manager believes that the price should be 10% lower than the current price. The company currently achieves a pretax return of 10% on sales of the dolls, and the top managers want to continue this rate of return.

Following are the per-unit costs for baby dolls, based on production of 500,000 per year:

Direct materials (variable) $ 4.50

Direct labor (variable) 1.00

Machining costs (fixed depreciation and maintenance) 5.00

Inspection costs (variable) 0.50

Marketing costs (fixed) 0.25

Administrative costs (fixed) 0.75

Total cost $12.00

a. Calculate the price recommended by the marketing department.

b. Given the price you calculated in Part (a), calculate the new contribution margin and the target cost.

c. Calculate the target cost reduction for each cost category, assuming proportional cost reduction across categories.