how to compute the target cost saving?

QUESTION 4 Great Decor (GD) manufactures and sells customised kitchen cabinet. The current kitchen cabinet costs about RM2,000 per set and GD has been using the cost-plus pricing approach marking its product up to approximately 25 percent of total cost. The company has been profitable; however, it has recently lost considerable business to competitors that have become very aggressive in the marketplace. As part of the effort to improve the company's profitability, the firm is considering introducing a new design of kitchen cabinet next year. GD's cost accountant presents the following cost data for the expected production of 80 sets. Design and specification RM 8,000 Direct materials RM 32,000 Direct manufacturing labor RM 38,000 Variable manufacturing overhead RM 32,000 Fixed manufacturing overhead RM 26,000 Marketing RM 14,000 An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that GD is considering and other models having only a few. The current market price of similar model is around RM2,000. Assume that GD's target operating income (profit margin) is 25% of revenue. Required: 1. Companies that produce custom products often have a difficult time determining a reasonable market price. How is cost-plus pricing used to arrive at a reasonable price for this? Explain and show computations of the GD's current price of kitchen cabinets. (5 marks) 2. GD's cost accountant found that competitors appear to be using a target costing approach and suggests that GD should also use the same approach in its pricing strategy. Explain the following: a. What is a target costing approach and how does it relate to pricing strategy? (3 marks) b. How can GD apply the approach to its both, current and new model of kitchen cabinets? (3 marks) 9 3. Assume that GD desires to apply a target costing approach for both, current and new model of kitchen cabinets. Answer the followings with relevant computations: a. Compute the target cost saving (if any) for the current model of kitchen cabinet. Assume that the market price of similar model is RM2,200. (5 marks) b. Compute the target cost for the new model of kitchen cabinet. (3 marks) c. Refer to your answer in question 3(b). Explain whether or not the cost estimate prepared by the cost accountant meet the target cost and suggest TWO possible improvements if necessary. (6 marks)