Party City Manufacturing makes a product called the Professional Shade Event Tent (Pro-Shade). Party City sells 50,000 units each month for $230.00 each. Monthly manufacturing costs incurred are summarized in Exhibit one.

Senior management of Party City Manufacturing is concerned about the increasing number of competitive products that are emerging in the market where the Pro-Shade competes. The market is quite competitive with little product differentiation. One of Party City's competitors has recently announced a price reduction of 5%, so management is considering its options. It knows it must match its competitor's selling price per unit if it is to maintain its market share, so Party City will have to lower its selling price by 5%. Demand for the product is expected to remain strong for the next few years but competition will be fierce. Selling price and timely delivery will be the key factors in maintaining the company's market share.

Management's objective is to maintain the operating income at its current level. It has asked the product manager for the Pro-Shade to consider all aspects of design and production with a goal of maintaining the current operating income with the anticipated price reduction. The information gathered by the product manager is summarized in Exhibit two.

Required: 1. Calculate Party City's monthly product profitability (product operating income) for the ProShade for the current fiscal year (before any changes are introduced). (4 marks) 2. What is the per unit full manufacturing target cost for the Pro-Shade that Party City must achieve in order to maintain the same operating income as calculated in required 1? (2 marks) 3. Calculate Party City's monthly product projected profitability (product operating income) for the re-designed Pro-Shade. Based on your calculation, did Party City meet its objective? Explain (6 marks) 4. Which cost items would you recommend for further re-design? Explain for full marks. (3 marks

Exhibit One

Pro-Shade Cost and Product Information

Direct materials $96.00 per unit

Direct labour $60.00 per unit

Machine costs $25.00 per unit

Inspection costs $25.00 per testing hour

Rework costs $70.00 per unit

re-worked Purchasing & Materials Handling (variable) $1.25 per unit

Purchasing & Materials Handling (fixed) $280,000 per month

Fixed manufacturing costs $380,000 per month

Design & engineering costs (fixed) $170,000 per month

Machine time required to manufacture one unit of the Pro-Shade 1.20 hours per unit

Exhibit Two

Information on the Pro-Shade and the Re-Designed Pro-Shade

Current Situation Redesigned Pro-Shade

Direct material Considered a variable cost Costs are expected to be 3% lower

Direct labour Considered a variable cost Labour rates will be 2% lower Machine costs Considered a variable cost Design change will reduce machine

time by 30%

Inspection cost All units are inspected Inspection time will be reduced by 2.5%. takes 0.25 hours per unit All units will continue to be inspected.

Re-work costs 3% of all units sold are reworked The number of units re-worked will be reduced by 50% by adding a second inspection

point. The cost per unit of the second inspection point

is 50%of the cost of the first inspection.

Purchasing & Materials Considered a variable cost Efficiencies in materials

handling will reduce the unit cost by 10%

Handling (variable)

Purchasing & Materials Considered a fixed cost No change is anticipated

Handling (fixed)

Fixed manufacturing costs Considered a fixed cost No change is anticipated

Design costs Considered a fixed cost Cost increase of $3,000 per month

to implement the changes suggested.