Problem 5-19B

Target pricing and target costing with ABC

Klein Corporation manufactures two models of watches. Model Wonder displays

cartoon characters and has simple features designed for kids. Model Marvel has

sophisticated features such as dual time zones and an attached calculator. Kleins

product design team has worked with a cost accountant to prepare a budget for the two

products for the next fiscal year as follows.

Direct Cost

Wonder (W)

Marvel (M)

Direct

materials

$10 per unit

$20 per unit

Direct labor

$25/hour 0.3 hour production

time

$25/hour 0.7 hour production

time

Category

Estimated Cost

Cost

Driver

Use of Cost Driver

Materials

handling

$ 183,000

Number of parts

W: 700,000; M: 520,000

Machine

setups

90,000

Number of setups

W: 50; M: 40

Product

testing

14,000

Number of units

tested

W: 1,000; M: 400

Facility

depreciation

180,000

Number of

machine hours

W: 3,200; M: 4,000

Total

$467,000

Wonder watches have 35 parts, and Marvel watches have 65 parts. The budget calls for

producing 20,000 units of Wonder and 8,000 units of Marvel. Klein tests 5 percent of

its products for quality assurance. It sells all its products at market prices.

Required

a. Compute the cost per unit for each product.

b. The current market price for products comparable to Wonder is $28 and for

products comparable to Marvel is $85. What will Kleins profit or loss for the next

year be?

c. Klein likes to have a 25 percent profit margin based on the current market price for

each product. What is the target cost for each product? What is the total target

profit?

d. The president of Klein has asked the design team to refine the production design to

bring down the product cost. After a series of redesigns, the team recommends a new

process that requires purchasing a new machine that costs $200,000 and has five

years of useful life and no salvage value. With the new process and the new machine,

Klein can decrease the number of machine setups to four for each product and cut

the cost of materials handling by 60 percent. The machine hours used will be 4,500

for Wonder and 6,500 for Marvel. Does this new process enable Klein to achieve its

target costs?