Magic Muzik Inc. (MMI) is a company currently manufacturing and selling analogue radio products. MMI is considering extending its product range to include digital mobile radios. Digital radios have much better sound quality than traditional analogue radios, and have a large number of potential additional features. For example, latest technology allows for digital mobile radios to include data plans for streaming music. This is a new capability and has not been offered in the current market. MMI is the market leader in the world of analogue radio products. Its customers are mainly from the developing regions. The company has fallen behind in the developed markets where consumers demand mainly digital products. MMI started its research into digital technology very late, and is currently spending huge sums of money in an attempt to catch up with competitors world-wide. Analogue radios are produced by traditional production methods. Specifically, assembly line workers assemble the various radio components. Production overheads at MMI are currently absorbed into product costs on the basis of assembly labour hours. MMI is considering using a target costing approach for its new digital radio product. Discuss the pros and cons of MMI adopting a target costing approach for its new digital mobile radio product. (9 marks) Part B MMI has set a selling price of $40 per unit for its new digital radio. This selling price will allow for MMI to compete with a similar radio on the market with comparable features to MMI's new intended product Management has agreed that a 25% margin on sales will be acceptable. Cost information for the new radio is as follows: Materials Each digital radio will require purchase of a circuit board at $4 each. Delivery cost of each circuit board is expected to be $0.60 per board. 20cm of wiring is specified for each radio. MMI estimates that 5% of the wire used in production is unavoidable wastage. Wire costs $0.70 per metre. Other direct materials are estimated to cost $8 per radio. Labour Assembly labour takes 30 minutes to assemble a radio, and the assembly workers are paid $14 per hour. Production Overheads Production overheads of $7,680,000 are absorbed on the basis of assembly hour. Production overheads are absorbed based on normal annual activity levels. In a typical year, 240,000 assembly hours are worked by MMI. Required: Calculate the target cost per unit for MMI's new digital radio. Compute the cost gap per unit (if any) based on MMI's current estimations. (Round all your workings and answers to 2 decimal places). (8 marks)
