Good Life Ltd (GL Ltd) assembles many types of electrical goods for office and home usage. The product development department of the company is now venturing into a new product called 'Quick Floor Cleaner' (QFC) for home usage. The QFC will be assembled by their factory workers using a variety of components such as pump, sponge, heating unit, solution tank, recovery tank, motor, casing and wheels. Production overheads costs are currently absorbed into finished product based on skilled labor hours.

GL Ltd is considering a target costing approach for its new product, so that QFC can withstand the competition from other brands in a competitive market.

Appraise the information given below with regards to QFC and answer the question there-after:

1)Pump - a unit of QFC requires two pumps, which are bought from a supplier in Indonesia at a price of $110.00 per unit. They can be purchased in batches of 1,000 units or 2,000 units. Seafreight charges are fixed at $6,000 per batch and are billed separately by the supplier. If GL Ltd buys in batches of 2,000 units, the unit price will be reduced by $10 per unit.

2)Sponge - is needed to suck the dirt from the floor. 2 pieces are needed for each QFC. However, there is a 10% scrap involved during the cutting process of the sponge, and the costs of these damaged sponges are to be borne by the good units. Sponge are bought from a local supplier in batches of 3,000 pieces at a price of $25.20 per piece.

3)Heating unit - The market price is $160.00 per unit. However, a trade discount of 10% is always given to GL Ltd because of their regular and huge orders placed. One unit will be used for each QFC. The supplier is also offering a cash discount of 10% for settlement made within two weeks and GL Ltd will take up this offer.

4)Detergent tank - these are bought in boxes and cost $1,288 per box. There are 20 tanks in each box. The economic order quantity is 20 boxes and it's normal for 5% of the detergent tanks supplied to be dented but the supplier has agreed to replace them free of charge. One tank for each QFC.

5)Waste tank - the cost of each tank is $90.00 net of a 10% trade discount. GL Ltd will not take the trade discount into account since it is unpredictable. One tank for each QFC.

6)Motor - bought in bulk order of 3,000 units. Total cost of each bulk order is $600,000 and 6% bulk discount is available for each bulk order. Only one motor is needed per QFC.

7)Casing (cover) - these are bought in bulk-order of 4,000 units. The total cost of each bulk-order is $400,000 net of a trade discount of 10%. The supplier is offering a 10% settlement discount which GL Ltd will take up.

8)Wheels - these are bought from a supplier who charges $100,000 for 5,000 wheels. Six wheels are needed for each QFC but an additional wheel is packed as complementary item.

9)Other material - Other materials cost $24.00 per QFC.

10)Skilled labor - it takes 9 hours (hours worked) to assemble 2 units of QFC and skilled workers are paid $40.00 per hour. It is estimated that 10% of hours-paid to the skilled workers is for unavoidable idle-time such as waiting for materials.

11)Production Overheads - The recent historical cost analysis has revealed the following data:

Total Production OverheadTotal Skill Labor Hours

Month 1$80,00010,000

Month 2$120,00020,000

Month 3 $160,000 30,000

Fixed production overhead costs are absorbed on skilled labor hour and the normal monthly activity levels of 20,000 skilled labor hours.

12)Non-Production Overheads -absorbed at a rate of 10% of the market selling price.

13)A competitive market selling price for the QFC will be $1,400 per unit. The management team had agreed that the acceptable profit mark-up should be set at 40%.

Required:

Ascertain the estimated total cost per unit of QFC, the target cost and identify the cost gap. Discuss TWO (2) ways that GL Ltd can undertake to close the cost-gap.