Problem 1.

A company manufactures air conditioning systems. The marketing department has suggested that there is a need in the industry for air conditioning systems for small enterprises. A market study has shown that customers would be willing to pay a price of $3,000 per unit for such a product. The company earns a sales margin of 25%. The estimated production costs are $2,500 per unit.

Required:

a.Calculate the target profit on this product for 100 units.

b.Calculate the target cost for the production of 100 units of the new product.

c.Compare the target costs with the estimated costs. With this information, state what action the company should take.

d.The controller of the company believes that target costing is no different from traditional costing. Explain the major differences between these two costing approaches.