IMD Ltd manufactures two (2) products ‘P’ and ‘Q’ for computer industry as follows: Product Annual production and sales Selling price per unit P 100,000 units $110.00 Q 50,000 units $150.00 Direct and indirect costs incurred on these two products are as follows: 

Particulars P 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 750,000 500,000 1,250,000 Indirect costs Machine setup cost 462,000 Testing cost 2,850,000 Engineering cost 2,250,500 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 Total set-ups 100 100 Testing time per unit 5 hours 9 hours Engineering cost $840,200 $1,410,300 --- Case study 3 continued on next page --- ACCT1064 Final Assessment, Semester 1 2022 Page 4 of 4 RMIT Classification: Trusted --- Case study 3 continued --- Currently, the time required for setting up the production of each batch of product Q is 50% more than the time required for setting up the production of each batch of product P. The total set-up time for IMD Ltd is 7,500 hours per annum. A foreign competitor has introduced a product very similar to product ‘P’. To maintain the company’s market share and profitability, IMD Ltd will have to reduce the selling price of ‘P’ to $90 per unit. 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 $10 per unit. • Direct labour cost is expected to decrease by $3.25 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 batch of product P. • 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?

(c) Evaluate if the new design for product ‘P’ achieves the cost reduction target. Show all calculations in detail.