Target Price $144 00 Less Desired profit (25 of price) 36 00 Target Cost $108 00 Current Cost Materials $54 00 Labor 27 00 Overhead 33 75 Selling 10 00 General administrative 15 00 Total current cost $139 75 Cost Gap $31 75 cost gap to current cost 22 7 The managers of the various department have evaluated the activities related to this product and have provided the following suggestions to narrow the cost gap From the design department the drive engine is the most expensive If we redesign the product we can eliminate $5 of direct labor, $15 of direct materials and $6 25 of overhead The redesign would cost $600,000 which we would want to recoup over the first 100,000 units (or $6 per unit) From the marketing department we can cut selling (marketing costs) by 30 as we have strong distribution channels and relationships in place from out other products From the accounting department the customer service costs for can be reduced by 60 The original estimates were done based on existing channels and customers which can be improved Required Is the organization in the establishment or the attainment stage of target costing Use the changes suggested above to develop a new estimate of the cost and cost gap How much further do they need to go in order to achieve the desired profit

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Posted on Jul 18, 2024

Target Price $144.00 Less: Desired profit (25% of price) 36.00 Target Cost $108.00 Current Cost: Materials $54.00 Labor 27.00 Overhead 33.75 Selling 10.00 General &

Target Price	$144.00
Less: Desired profit (25% of price)	36.00
Target Cost	$108.00

Current Cost:
Materials	$54.00
Labor	27.00
Overhead	33.75
Selling	10.00
General & administrative	15.00
Total current cost	$139.75
Cost Gap	$31.75
% cost gap to current cost	22.7%

The managers of the various department have evaluated the activities related to this product and have provided the following suggestions to narrow the cost gap.

From the design department - the drive engine is the most expensive If we redesign the product we can eliminate $5 of direct labor, $15 of direct materials and $6.25 of overhead. The redesign would cost $600,000 which we would want to recoup over the first 100,000 units (or $6 per unit).
From the marketing department - we can cut selling (marketing costs) by 30% as we have strong distribution channels and relationships in place from out other products.
From the accounting department - the customer service costs for can be reduced by 60%. The original estimates were done based on existing channels and customers which can be improved.

Required: Is the organization in the establishment or the attainment stage of target costing? Use the changes suggested above to develop a new estimate of the cost and cost gap. How much further do they need to go in order to achieve the desired profit?