Question 3 Alif Electrical makes small electric motors for a variety of home appliances Alif sells the motor to appliance makers, who assemble and sell the appliances to retail outlets Although Alif Electrical makes dozen of different motors, it does not currently make one to be used in garage door openers The companys market research department has discovered a market for such a motor The market research department has indicated that a motor for garage door openers would likely sell for RM26 A similar motor currently being produced has the following manufacturing costs RM Direct materials 13 00 Direct labor 6 00 Overhead 8 00 Alif desires a gross margin of 20 of the manufacturing cost Required Suppose Alif Electrical uses cost plus pricing, setting the price 20 above the manufacturing cost, what price would be charged for the garage door opener motor Would you produce such a motor if you were a manager at Alif Electrical Explain (5 marks) Suppose that with an addition of special function, the garage door opener motor could be sold at RM38 per unit The special function would increase the current manufacturing cost by 10 If Alif Electrical is using a cost plus pricing to set the price 20 above the manufacturing cost, what price would be charged for the motor Would you produce such a motor if you were a manager at Alif Electrical Explain (5 marks) Ignore the information from requirement (2) Suppose Alif Electrical uses target costing, what price would the company charge for a garage door opener motor What is the highest acceptable manufacturing cost for which Alif Electrical would be willing to produce the motor (4 marks) As a user of target costing, what steps would Alif Electricals managers take to try to make production of this product feasible (5 marks) In target costing, prices determine costs rather than vice versa Explain (3 marks) If Alif Electrical chooses to use target costing as a method to determine its pricing, it must involve both customers and suppliers in product and process design Explain why (3 marks)

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Question 3 Alif Electrical makes small electric motors for a variety of home appliances. Alif sells the motor to appliance makers, who assemble and sell

Question 3

Alif Electrical makes small electric motors for a variety of home appliances. Alif sells the motor to appliance makers, who assemble and sell the appliances to retail outlets. Although Alif Electrical makes dozen of different motors, it does not currently make one to be used in garage-door openers. The companys market research department has discovered a market for such a motor.

The market research department has indicated that a motor for garage-door openers would likely sell for RM26. A similar motor currently being produced has the following manufacturing costs:

	RM
Direct materials	13.00
Direct labor	6.00
Overhead	8.00

Alif desires a gross margin of 20% of the manufacturing cost.

Required:

Suppose Alif Electrical uses cost-plus pricing, setting the price 20% above the manufacturing cost, what price would be charged for the garage-door-opener motor? Would you produce such a motor if you were a manager at Alif Electrical? Explain.

(5 marks)

Suppose that with an addition of special function, the garage-door-opener motor could be sold at RM38 per unit. The special function would increase the current manufacturing cost by 10%. If Alif Electrical is using a cost-plus pricing to set the price 20% above the manufacturing cost, what price would be charged for the motor? Would you produce such a motor if you were a manager at Alif Electrical? Explain.

(5 marks)

Ignore the information from requirement (2). Suppose Alif Electrical uses target costing, what price would the company charge for a garage-door-opener motor? What is the highest acceptable manufacturing cost for which Alif Electrical would be willing to produce the motor?

(4 marks)

As a user of target costing, what steps would Alif Electricals managers take to try to make production of this product feasible?

(5 marks)

In target costing, prices determine costs rather than vice versa. Explain.

(3 marks)

If Alif Electrical chooses to use target costing as a method to determine its pricing, it must involve both customers and suppliers in product and process design. Explain why.

(3 marks)