Question 3 Ming Fai Electronics Company (Ming Fai) is a well-known semiconductors and microchip manufacturer. The company developed Thor, a new chipset used in the mobile phone industry, and planned to launch the product to market in 2020. Tony Chan, the CEO of Ming Fai, appointed you as the management accountant to help him to establish a business plan for selling Thor, especially on the determination of selling price. You are given the following budgeted cost data for Thor in 2020: Direct materials $5 per unit Direct labour $3 per unit Variable manufacturing overhead $2 per unit Marketing expense $1 per unit sold Product design and licensing $300,000 Fixed manufacturing overhead $200,000 General and administration costs (all fixed costs) $100,000 Tony anticipates manufacturing and selling 200,000 units of Thor in 2020, with no inventory at the end of the year. Based on the current market condition, the sales director advises Tony that Ming Fai can sell Thor successfully for $18. Ming Fai requires a target operating income for all its products at 30% of revenue.

Required

(a) Compute the target full cost of producing and selling 200,000 units of Thor in 2020. Comment on whether the current cost budget can meet Ming Fais target operating income. If not, what is the gap with the target cost? Show your calculations.

(b) As a proposal for value engineering, the production manager suggests to replace a special component part in the product with an equivalent component part to be supplied by a new supplier in Mainland China. This would reduce the direct materials costs by 50% but an additional reengineering charge of $100,000 is required to make the change and ensure that all original features of the product are not affected. With this proposal, will Ming Fai achieve its target operating income of 30% of revenue? Show your calculations.

(c) Tony is having hesitation to reengineer the product. In fact he has been advised by his sales director to launch a big-scale marketing campaign to promote Thor in 2020. He believes that with the campaign Ming Fai can sell the product at a price of $25 without losing any sales. The additional cost of the marketing campaign is estimated to be $500,000. With this proposal, will Ming Fai achieve its target operating income of 30% of revenue? Show your calculation. (6 marks)

(d) What short-term and long-term issues, both quantitative and qualitative, might Tony consider when deciding between the proposals under requirement (b) and (c)?