Target costing

Feedastudent Ltd are developing a Gift food service for students. Market research has indicated that customers would be willing to pay 50 for the product. The company usually expect a profit margin of 10% on products.

Fixed costs for marketing and promotion is expected to be 12,000 per year. The company expects orders for 3000 units this year. Food costs are expected to be 41 per unit. Packaging and administration costs are 2 per service.

Required:

1. Calculate whether Enterprise Ltd can expect to make a profit this year.

2. A reduction in the fixed costs of 4,000 could be achieved but this would result in a reduction of expected sales to 2000 per year. Would this reduce the cost gap and be a more profitable solution?

[5 marks]

3. Alternatively, cheaper food costing only 38 could be used but this may affect its reputation and result in fewer sales next year. Should Enterprise consider this? Give reasons for your answer and examples of how this could work.

4. Alternatively, packaging and admin could be outsourced to Amazonia for an initial payment of 1200 and thereafter a variable cost of 1 per item. Is this worth considering?

5. Suggest other possible actions that Enterprise could take to enable them to make a profit.