. SRB Corporation manufactures and sells espresso machines for $80 each. In a recent accounting period, SRB incurred the following costs to produce 5,000 espresso machines:

Direct material $ 18,250

Direct labour 36,250

Variable manufacturing overhead 22,250

Fixed manufacturing overhead 59,000

Variable nonmanufacturing costs 19,750

Fixed nonmanufacturing costs 41,000

Total $196,500

1. SRB's marketing research department has proposed developing a better quality espresso machine, which would sell for a price of $120. Top management will accept the proposal provided the profit margin is 40%. Calculate the target cost per unit for the new espresso machine.
2. Recent market research has suggested SRB should sell the existing espresso machines for $60 each. Calculate the percentage decrease required for each cost category listed above, assuming a 40% profit margin and proportional cost reduction across categories.

Solution

c) Ignore the information in part (b). SRB anticipates demand for its current espresso machines will increase by 25% in the coming year. Assume that operations remain within the relevant range. Calculate the following amounts assuming SRB uses a 40% mark-up on total cost (including per-unit fixed costs) to determine product prices:

1) Total costs

2) Price per espresso machine

3) Total profit

d) Explain why each of the following is uncertain:

1) Expected customer demand for the espresso machines.

2) Ability to achieve the cost reduction identified in part (b).