The company is considering launching a new product called Super Man. The company uses target costing in supporting the design process. The company has carried out some market research and has estimated that at a price of K200 demand will be 1,600 units and at a price of K220 demand is expected to be 1560 units. The company plans to produce and sell 1,500 units during the coming period. The company has a target profit margin of 50%. Expected production costs are K115 per unit and K35 per unit non- production costs.

Required:

(a) Explain the steps in implementing a target costing system.

(b) Calculate the selling price that the company should set in order to sell 1,500 units.

(c) Calculate the target cost of the new product and the target cost gap if Lam wishes to sell 1,500 units a year.

(d) List any four ways in which Lam might close the cost gap.

(e) What are the possible advantages that will accrue to Lam for using Target costing.