JamTech Limited assembles and sells many low-end cellular phones. It is considering extending its product range to include cellular phones with greater functionality.

A cellular phone is produced by assembly workers assembling a variety of components. Production overheads are currently absorbed into product costs on an assembly labour hour basis.

JamTech Ltd is considering a target costing approach for its new line of cellular phones.

A selling price of $56 has been set in order to compete with a similar phone in the market that has comparable features to JamTech Ltds intended product. The board have agreed that the acceptable margin (after allowing for all production costs) should be 15%.

Cost information for the new cellular phone is as follows:

Component 1 these are bought at a cost of $3.50 each. The are purchased in batches of 5,000 and additional delivery coss are $3,200 per batch.

Component 2 In an ideal situation 30 cm of wiring is needed for each cellular phone. However, there is some waste involved in the process as wire is occasionally cut to the wrong length or is damaged in the assembly process. The company estimates that 5% of the purchased wire is lost in the assembly process. Wire costs $0.80 per 100 cm to buy.

Other materials other material costs $7.95 per phone.

Assembly labour these are skilled people who are difficult to recruit and retain. The company has more staff of this type than needed but is prepared to carry this extra cost in return for the security it gives the business. It takes 45 minutes to assemble a phone and the assembly worker is paid $15.00 per hour. It is estimated that 10% of hours paid to the assembly worker is idle time.

Production overheads recent historical cost analysis has revealed the following production overhead data:

	Total production overhead/$	Total assembly labour hours
Month 1	590,000	15,000
Month 2	720,000	25,000

Fixed production overheads are absorbed on an assembly hour basis based on normal activity levels. In a typical year, 200,000 assembly hours are worked by the company.

Required:

(a) Calculate the expected cost per unit for the cellular phone and identify and identify

any cost gaps that may exist. [20 marks]

(b) Cellular phones are products which very short lifecycles. Identify two costs in each of the phases that will be incurred over the life of this product. [5 marks]