Khat Craft Creations (KCC) designs, manufactures and sells modern wooden khat gift set. Tareeq is an art artist for KCC. Tareeq has spent much of the past month working on the design of a sophisticated abstract piece. Hazeeq, product development manager, likes the latest design. However, he wants to make sure that the latest design can be priced competitively. Saleema, KCCs cost accountant, presents the following cost data for the expected production of 75 sets. Design cost 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 The companys target operating income (profit margin) is 25% of revenue and follows full cost pricing policy.

Required:

a. Hazeeq thinks KCC can successfully sell each set for RM2,500. Does the cost estimate prepared by Saleema meet Hazeeqs proposed selling price? Explain.

b. Refer to original data. Hazeeq discovers that Tareeq has designed the gift set using the highest grade wood available, rather than the standard grade of wood that KCC normally uses. Hazeeq thinks that, by replacing the grade of wood from highest grade to the standard grade, will lower the cost of direct materials by 60%. However, the redesign will require an additional RM1,100 of design cost, and the gift set will be sold for RM2,400 each. Do changes in the costs and price as suggested by Hazeeq will allow the company to meet its target cost? Explain.

c. Refer to original data. Hazeeq insists that the higher wood grade is necessary for the gift sets design. He believes that spending an additional of RM3,000 on marketing will allow KCC to sell each gift set for RM2,800. If this is the case, will the companys target cost be achieved? Explain.

d. Assume that the market price of a similar wooden khat gift set is RM2,600 and profit margin of the industry is 20%.

i. Refer to Hazeeqs recommendations given in requirement (a), (b) and (c). Compute total operating income and profit margin for each of Hazeeqs recommendations, AND

ii. Suggest the best recommendation that KCC should opt for. Briefly explain your answer. (Hint: Compare your answer in d (i) and information from the industry/market. Show all workings)