Treadwell Electronics, Inc., produces circuit boards for electronic devices that are made by more than a dozen customers. Competition among the producers of circuit boards is keen, with over 30 companies bidding on every job request from those customers. The circuit boards can vary widely in their complexity, and their unit prices can range from $250 to more than $500.
Treadwell's controller is concerned that the cost planning projection for a new complex circuit board, the CX35, is almost 6 percent above its target cost. The controller has asked the Engineering Design Department to review its design and projections and come up with alternatives that will reduce the proposed product's costs to equal to or below the target cost.
The following information was used to develop the initial cost projections:
Target selling price............................................ $590.00 per unit
Desired profit percentage.............................. 25% of total unit cost
Projected unit demand............................................ 13,600 units
Per-unit data:
Direct materials cost.................................................... $56.00
Purchased parts cost.................................................... $37.00
Manufacturing labor:
Hours ........................................................................4.5
Hourly labor rate....................................................... $14.00
Assembly labor:
Hours....................................................................... 5.2
Hourly labor rate..................................................... $15.00
Machine hours................................................................ 26
Activity-based cost rates:
Materials handling........................ 10% of direct materials and purchased parts cost
Engineering...................................................................... $13.50 per unit
Production............................................................... $8.20 per machine hour
Product delivery................................................................. $24.00 per unit
Marketing.......................................................................... $6.00 per unit
1. Compute the product's target cost.
2. Compute the product cost of the original estimate to verify that the controller's calculations were correct.
3. Rework the product cost calculations for each of the following alternatives recommended by the design engineers:
a. Cut product quality, which will reduce direct materials cost by 20 percent and purchased parts cost by 15 percent.
b. Increase the quality of direct materials, which will increase direct materials cost by 20 percent but will reduce machine hours by 10 percent, manufacturing labor hours by 16 percent, and assembly labor hours by 20 percent.
4. What decision should Treadwell's management make about the new product? Defend your answer.