Value engineering, target pricing, and locked-in costs. Pacific Dcor, Inc., designs, manufactures, and sells contemporary wood furniture.

Question:

Value engineering, target pricing, and locked-in costs. Pacific Décor, Inc., designs, manufactures, and sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of the past month working on the design of a high-end dining room table. The design has been well-received by Jose Alvarez, the product development manager. However, Alvarez wants to make sure that the table can be priced competitively. Amy Hoover, Pacific’s cost accountant, presents Alvarez with the following cost data for the expected production of 200 tables:
Design cost...............$ 5,000
Direct materials..............120,000
Direct manufacturing labor........142,000
Variable manufacturing overhead.....64,000
Fixed manufacturing overhead.......46,500
Marketing................15,000
Required
1. Alvarez thinks that Pacific can successfully market the table for $2,000. The company’s target operating income is 10% of revenue. Calculate the target full cost of producing the 200 tables. Does the cost estimate developed by Hoover meet Pacific’s requirements? Is value engineering needed?
2. Alvarez discovers that Li has designed the table two inches wider than the standard size of wood normally used by Pacific. Reducing the table’s size by two inches will lower the cost of direct materials by 40%. However, the redesign will require an additional $6,000 of design cost, and the table will be sold for $1,950. Will this design change allow the table to meet its target cost? Are the costs of materials a locked-in cost?
3. Li insists that the two inches are an absolute necessity in terms of the table’s design. She believes that spending an additional $7,000 on better marketing will allow Pacific to sell the tables for $2,200. If this is the case, will the table’s target cost be achieved without any value engineering?
4. Compare the total operating income on the 200 tables for requirements 2 and 3. What do you recommend Pacific do, based solely on your calculations? Explain briefly.