QUESTION THREE

Treble Plc is planning to commence production of a new product the Dom. It is expected that demand for the Dom will last for 6 years and that they will sell 1,000 units in the first year; 3,000 units in the second year and 6,000 units per year thereafter. The selling price will be ZMW15 per unit and the company wishes to achieve a mark-up of 50% on cost.

The following costs have been estimated:

Design and development ZMW 40,000

Variable production Cost: ZMW 7 per unit

Additional fixed production cost ZMW 4000 per year

End of life cost ZMW 10,000

Required

1. Calculate the target cost per unit for the production of Doms. (3 Marks)
2. Calculate the actual full production cost per unit for the first year and comment as to whether or not there is a cost gap. (6 Marks)
3. Calculate the lifecycle cost per unit and comment as to whether or not there is a cost gap. (6 Marks)
4. State and explain three measures a company could take to close a cost gap.

(6 Marks)

5. Explain how target costing can be beneficial to modern day business managers.

(4 Marks)

(25 Marks)