Target pricing and target costing with ABC Ricardo Corporation manufactures two models of watches. Model Wonder displays cartoon characters and has simple features designed for kids. Model Marvel has sophisticated features such as dual time zones and an attached calculator. Ricardo's product design team has worked with a cost accountant to prepare a budget for the two products for the next fiscal year as follows.

Wonder watches have 35 parts, and Marvel watches have 65 parts. The budget calls for producing 20,000 units of Wonder and 8,000 units of Marvel. Ricardo tests 5 percent of its products for quality assurance. It sells all its products at market prices.
Required
a. Compute the cost per unit for each product.
b. The current market price for products comparable to Wonder is $43 and for products comparable to Marvel is $115. What will Ricardo's profit or loss for the next year be?
c. Ricardo likes to have a 25 percent profit margin based on the current market price for each product. What is the target cost for each product? What is the total target profit?
d. The president of Ricardo has asked the design team to refine the production design to bring down the product cost. After a series of redesigns, the team recommends a new process that requires purchasing a new machine that costs $400,000 and has five years of useful life and no salvage value. With the new process and the new machine, Ricardo can decrease the number of machine setups to four for each product and cut the cost of materials handling in half. The machine hours used will be 4,500 for Wonder and 6,500 for Marvel. Does this new process enable Ricardo to achieve its target costs?

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Marvel (M) $20 per unit $40/hour x 0.7 hour production time Use of Cost Driver Wonder (W) Direct Cost Direct materials Direct labor $10 per unit $40/hour x 0.3 hour production time Estimated Cost Cost Driver Category Materials handling Machine setups Product testing Facility depreciation Total Number of parts Number of setups Number of units tested Number of machine hours W: 700,000; M: 520,000 $36,000 W: 50; M: 40 W: 1,000; M: 400 W: 3,200; M: 4,000 180,000 28,000 360,000 $934,000