Pacific Dcor, Inc., designs, manufactures, and sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of the past month working on the design of a high-end dining room table. The design has been well received by John, the product development manager. However, John wants to make sure that the table can be priced competitively. Amy, Pacifics management accountant, presents John with the following cost data for the expected production of 200 tables:

Design cost$ 5,000Direct materials120,000Direct manufacturing labor142,000Variable manufacturing overhead64,000Fixed manufacturing overhead46,500Marketing15,000

Required:

1. John thinks that Pacific can successfully market the table for $2,000. The companys target operating income is 10% of revenue. Calculate the target full cost of producing the 200 tables. Does the cost estimate developed by Amy meet Pacifics requirements? Is value engineering needed? Explain.

(5 marks)

2. John discovers that Li has designed the table two inches wider than the standard size of wood normally used by Pacific. Reducing the tables size by two inches will lower the cost of direct materials by 40%. However, the redesign will require an additional $6,000 of design cost, and the table will be sold for $1,950. Will this design change allow the table to meet its target cost? Are the costs of materials a locked-in cost? Explain.

(5 marks)

3. Li insists that the two inches are an absolute necessity in terms of the tables design. She believes that spending an additional $7,000 on better marketing will allow Pacific to sell the tables for $2,200. If this is the case, will the tables target cost be achieved without any value engineering?

(4 marks)

4. Compare the total operating income on the 200 tables for requirements (b) and (c). What do you recommend Pacific do, based solely on your calculations? Explain briefly.

(5 marks)

5. Using your knowledge of cost management techniques, explain whether Activity-based Management (ABM) and product life cycle management will apply to help reduce costs. If so, explain how the principles of AMB and product life cycle management could be applied.