Question

Exercise 4-43 Target Costing and Purchasing Decisions (LO 4-3) Mira Mesa Appliances makes and sells kitchen equipment for offices and hotel rooms. Mira Mesa management believes that a new model of refrigerator made out of a synthetic material would sell well at a price of $430 per unit. Labor costs are estimated at $49 per unit and overhead costs would be $58 per unit. The major uncertainty is the price of the synthetic material. Mira Mesa is in negotiations with several suppliers for the material. Because of the risk associated with the new product, Mira Mesa will only proceed if the estimated return is at least 20 percent of the selling price. Required: What is the most Mira Mesa can pay for the synthetic material per unit (refrigerator) and meet its profitability goal? (Do not round intermediate calculations.) Highest material price per unit

Answer 1

1) Target cost = Selling price-Desired profit = 430-430*20% = 344

Highest material price per unit = Total cost-Direct labor-Overhead = 344-49-58 = 237

Highest material price per unit = 237

2) Selling price = Manufacturing cost+Desired profit

82.60 = X+.40X

X(Cost per unit) = 82.60/1.40 = 59

Direct labor cost per unit = 59-13-39.70 = 6.30

Direct hour per unit = 6.30/21 = 0.30 hour per unit

Maximum direct labor time per unit = 0.30 hour