Octopus Limited, a Cape Town-based engineering firm, develops and sells a range of mining equipment and industrial processing systems. The company has two divisions – mining and industrial processing. The mining division is well known for launching equipment for the mining sector and its new products are always eagerly anticipated by the mining industry.

The industrial processing division produces various processing systems for a range of industries. Octopus Limited has previously used a traditional absorption costing system and full cost plus pricing to cost and price its products.

It has recently recruited a new finance director, T Dlamini, who believes the company would benefit from using target costing. He is keen to try this method on a piece of new product, which has been recently approved.
After discussion with the board, Mr Dlamini undertook market research to find out customers' opinions on a new mining equipment and to assess potential new products offered by competitors.

1.1 Explain the concept of target costing and discuss any TWO (2) benefits of adopting a target costing approach so early in the product’s life cycle. (3 marks)

1.2 Using the information provided below, determine the target selling price for each unit of the mining equipment (show all calculations). (10 marks)

INFORMATION

Based on the results of the market research, Mr Dlamini has estimated total sales volume of 100 units. The company seeks to achieve a target profit margin of 35%. The cost data below has been projected for the new mining equipment:

1.3 Using the information provided below, determine the life-cycle cost per unit of the industrial processing system (show all calculations). (7 marks)

INFORMATION

 In addition to the mining equipment, the industrial processing division of Octopus is set to launch a newly developed industrial processing system. The following information relates to the system for the 2023 – 2025 financial years:

Production costs per unit: Direct material Direct labour Direct machining Set-up Assembly Inspection and testing Total non-production costs: Design (salaries and technology) Marketing Distribution R 240 000 175 000 122 500 17 500 35 000 28 000 7 000 000 3 600 000 5 000 000