The Digital Electronics Company manufactures cameras and video equipment. It is in the process of introducing
the world's smallest and lightest camcorder with 3D, HD and SD recording modes.
The company has undertaken market research to ascertain the customers' perceived value of the product. The
product's special features and a comparison with competitors' products and market prices have been used to
establish a target selling price and projected life time volume.
In addition, cost estimates have been prepared based on proposed product specification. The company has set a
target profit margin of 30% on the proposed selling price and this has been deducted from the target selling price
to get the target cost.
The following is a summary of the information that has been presented to the management:
| Project lifetime sales volume (units) | 300,000 |
| Sh. |
| Target selling price | 8,000 |
| Target profit margin (30%) | (2,400) |
| Target cost | 5,600 |
| Projected cost | 7,000 |
Before target costing exercise, the projected cost was estimated as follows:
| Manufacturing costs: | Sh. | Sh. |
| Direct materials (bought in parts) | 3,900 | |
| Direct labour | 1,000 | |
| Direct machining costs | 200 | |
| Ordering and receiving | 80 | |
| Quality assurance | 600 | |
| Rework | 150 | |
| Engineering and design | 100 | 6,030 |
| Non-manufacturing costs: | | |
| Marketing | 400 | |
| Distribution | 300 | |
| After sales service and warranty costs | 270 | 970 |
| Total cost | | 7,000 |
The company then engaged a team to carry out a functional analysis on the product manufacture. After a careful
analysis of the different elements, functions and attributes of the camcorder and potential customers interviewed
to ascertain the values that may place on each of the functions, the following report was given to management.
1. Direct material cost (bought in parts to be reduced by 1/6).
2. Direct labour should be reduced to 80%.
3. Machining costs would remain the same as the projection.
4. Ordering and receiving costs to reduce by 75%.
5. Quality assurance to reduce to 5/6 of the orginal estimate.
6. Rework and engineering costs to reduce by Sh.90 and Sh.20 respectively.
7. Marketing, distribution and after sales service and warranty costs to reduce by 37.5%, 33 \frac{1}{3}\% and by Sh.80
respectively.
Required:
(i) Revised target cost.
(ii) The cost gap.
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