The following costs pertain to Pyramid Printing Company, a U.S. producer of retail inserts and magazines for July 2015, during which it will print 40,000,000 copies of a retail insert.

Pyramid Printing Company	Jul-15
Printing design and engineering costs	$100,000
Raw materials	180,000
Direct labor	120,000
Variable manufacturing overhead	60,000
Factory insurance	50,000
Depreciation — machinery and facility	125,000
Repairs and maintenance — facility	25,000
Selling, marketing and distribution expenses	300,000

The company has a target cost proposed by a major customer of $5.00 per 100 copies. The expected gross margin is 60% of sales.

Requirements:

Determine whether the company is able to achieve its target cost per the schedule above and given the sales price indicated. Indicate whether it must employ value engineering.

Pyramid’s purchasing manager calls their paper supplier and negotiates a 30% price decrease for raw materials. Henry Russell, the company’s sales manager, indicates that he will cut the selling, marketing, and distribution expenses in order to reach the required target cost, given the above. If the cost of raw materials decreases by 30%, how much must the selling, marketing, and distribution expenses decrease in order to meet the required target cost?

Summarize your findings by commenting on the analysis. What other considerations apply to target costing analysis?