Question 3: (10 marks) (B1, C1)

Part A: (4 marks)

The selling price of Product Y is set at $1,200 for each unit and sales for the coming year are expected to be 1,000 units. A return of 40% on the investment of $800,000 in Product Y will be required in the coming year. What is the target cost for each unit of Product Y?

Part B: (6 marks)

Ahlia Company, a manufacturer of computer games, is in the process of introducing a new game to the market and has undertaken market research to find out about customers views on the value of the product, as well as to obtain a comparison with competitors products. The results of this research have been used to establish a target selling price of $80. This is the price that the company thinks it will have to sell the product at to achieve the required sales volume. Cost estimates have been prepared based on the proposed product specification.

Manufacturing cost $

Direct material 4.25

Direct labour 23.08

Direct machinery costs 1.05

Ordering and receiving 0.28

Quality assurance 4.8

Non-manufacturing costs $

Marketing 8.19

Distribution 3.27

The target profit margin for the game is 45% of the target selling price.

Instructions:

Calculate the target cost of the new game and the target cost gap.