The Digital Arts Company manufactures color laser printers. Model A200 presently sells for $300 and has a total product cost of $240, as follows:
Direct materials ........ $170
Direct labor ........... 40
Factory overhead ........ 30
Total ............. $240
It is estimated that the competitive selling price for color laser printers of this type will drop to $285 next year. Digital Arts has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:
1. Purchase a plastic printer cover with snap-on assembly. This will reduce the amount of direct labor by 6 minutes per unit.
2. Add an inspection step that will add 3 minutes per unit direct labor but reduce the materials cost by $5 per unit.
3. Decrease the cycle time of the injection molding machine from 4 minutes to 3 minutes per part. Twenty-five percent of the direct labor and 40% of the factory overhead is related to running injection molding machines.
The direct labor rate is $20 per hour.
a. Determine the target cost for Model A200.
b. Determine the required cost reduction.
c. Evaluate the three engineering improvements to determine if the required cost reduction (drift) can be achieved.