MaxiDrive manufactures a wide variety of parts for recreational boating, including a gear and driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, powerful outboards. The part sells for $610, and sales volume averages 25,000 units per year. Recently, MaxiDrives major competi- tor reduced the price of its equivalent unit to $550. The market is very competitive, and Maxi-Drive

Brief Exercises

Exercises

[LO 13-1]

Chapter 13 Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing 525

526 Part Two

Planning and Decision Making

realizes it must meet the new price or lose significant market share. The controller has assembled these cost and usage data for the most recent year for MaxiDrives production of 25,000 units:

Materials Direct labor Indirect labor Inspection (hours and cost) Materials handling (number of purchases and cost)

Machine setups (number and cost) Returns and rework (number of times and cost)

Required

Budgeted Quantity

920

3,500 1,400

300

Budgeted Cost

$ 6,500,000 2,500,000 2,500,000 300,000

500,000 750,000

80,000 $13,130,000

Actual Quantity

1,000

3,450 1,500

500

Actual Cost

$ 7,000,000 2,625,000 2,400,000

350,000

485,000 725,000

130,000 $13,715,000

1. Calculate the target cost for maintaining current market share and profitability.

2. Can the target cost be achieved? How?