Question 3: Managing costs: Target costing and Quality cost (25 marks) Ellipsis Electronics Ltd assembles and sells speakers for high-fidelity sound systems. Because of the rapid growth of technological innovation in the hi-fi market, the company is considering extending its product range to include a new Easy-Ear speaker system (EESS). A selling price of $60 has been estimated to compete with a similar speaker on the market that has comparable features to Ellipsis Electronic's intended product. A gross profit margin of at least 30% on the selling price would be required, to cover administration and marketing overheads and to make an acceptable level of profit. A cost estimation study has produced the following estimate of production cost for the new EESS. Cost item Direct material (Circuit board) Direct material (Wiring) Direct labor Particulars $9 per unit Each unit of the EESS will require 0.5 meters of wiring, but there will be necessary waste of 10% of the wires used. This waste is the result of cutting the wires to match with the required length. Wire costs $1.80 per meter. Each unit of the EESS will require 0.50 hours of direct labour time. However, it is expected that there will be unavoidable idle time equal to 5% of the total labour time paid for. Labour is paid $19 per hour. It is expected that production overheads will be absorbed into product costs at the rate of $60 per direct labour hour, for each active hour worked (Overheads are not absorbed into the cost of idle time). Production overheads + required: Question 3.1 Calculate the target cost per unit for the EESS and identify any cost gap that might exist compared to the Ellipsis's estimated costs. (7 marl Your Answer: Target costs Estimated costs Cost gap Show your workings here (expand the space as required): Question 3.2 Discuss possible steps Ellipsis Electronics Ltd could take to reduce this gap. [Word limit: 250 words. Note the word count at the end of your answer] Your Answer expand the space as required): (8 marks) Question 3.3 "Target costing technique is not relevant for managing costs in service industries due to the characteristics and information requirements of services businesses. Do you agree? Critically evaluate the statement. (10 marks) [Word limit: 300 words. Note the word count at the end of your answer] Your Answer (expand the space as required)