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3. Target Costing - Scope of Reduction A Toy Company T expects to successfully launch Toy Z based on a film character. T must pay 15% Royally on the Selling M17 Price to the Film Company. T's targets a Selling Price of 100 per toy and Profits of 25% Selling Price. The following are the Cost data Forecast / Toy Component A 8.50 Component B 7.00 Labour: 0.4 hr@ 60 per hour 24.00 Product Specific Overheads 13.50 In addition, each Toy requires 0.6 kg of Other Materials, which are supplied at cost of 16 per kg with a normal 4% sul standard quality which is not usable in the manufacture. You are required to determine if the above cost structure is within the Tamet Cost. If not, what should be the extent of Cost Reduction? ROCE Pricing, Target Costs Ramu is the Managing Partner of a business that has just finished building a Motel. He anticipates that he will rent these rooms for 16,000 room-nights next year. All rooms are similar and will rent for the same price. The following Operating Costs are *xpected to be incurred for next year - Variable Operating Costs 2 800 per room night Fixed Costs: Salaries and Wages 17,50.000 Maintenance of Building 3,70,000 Other Operating and Administrative Costs 14,00,000 Total Fixed Costs 35,20,000 The Capital invested is * 60 Lakhs and the Firm expects 25% return on its investment N 18 5. Target Costing - Labour Time to achieve desired Profit - Other Effects Zen Ltd forms a Committee consisting of its Production, Marketing and Finance Directors to prepare a budget for the next year. The Committee submits a Draft Budget as detailed below 50 Selling Price Per Unit Direct Material Cost Per Unit Direct Labour Cost Per Unit 24 Variable Overhead (3 hrs. @2) 26 Contribution Per Unit 25,000 units Budgeted Sales Quantity Budgeted Contribution (25,000 * 25) 6,50,000 Budgeted Fixed Cost 5,00,000 Budgeted Profit 1,50,000 The Management is not happy with the budgeted profit as it is almost equal to the previous year's profit. Therefore, it asks the Committee to prepare a budget to earn atleast a profit of 3,00,000. To achieve the Target Profit, the Committee reports back with the following suggestions: The Unit Selling Price should be raised to ? 55. The Sales Volume should be increased by 5.000 units. To attain the above said increase in Sales, the Company should spend 40,000 for advertising. The production time per unit should be reduced. C. . . To win the acceptance of the workers in this regard the hourly rate should be increased by 3 per unit besides an annual group bonus of 30,000. There is no change in the amount and rates of other expenses. The Company has sufficient production capacity