Question

MaxiDrive manufactures a wide variety of parts for recreational boating, including a gear and driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, powerful outboards. The part sells for $688, and sales volume averages 31,000 units per year. Recently, MaxiDrive’s major competitor reduced the price of its equivalent unit to $619. The market is very competitive, and MaxiDrive realizes it must meet the new price or lose significant market share. Management has begun paying closer attention to costs and has reconfirmed the current existing standard costs. The controller then assembled the following cost and usage data for the most recent year for MaxiDrive’s production of 31,000 units:

	Budgeted Quantity			Budgeted Cost			Actual Quantity			Actual Cost
Direct materials				$	7,100,000					$	7,600,000
Direct labor					2,740,000						2,925,000
Indirect labor					2,740,000						2,700,000
Inspection (hours and cost)		1,160			420,000			1,600			410,000
Materials handling (number of purchases and cost)		5,300			800,000			4,050			785,000
Machine setups (number and cost)		2,000			1,050,000			2,100			1,025,000
Returns and rework (number of times and cost)		420			140,000			620			190,000
				$	14,990,000					$	15,635,000

Required:

1. Calculate the target cost for maintaining current market share and profitability. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

1) Calculation of Target Cost for maintaining Current Market Share and Profitability :

Cost Per Unit =$ 1,56,35,000/ 31,000 = $504.35

Current Profit =Selling Price - Unit Cost = $688- $504.35 = $183.65

Target Cost = Competitors Selling Price - Current Profit =$619-$183.65 = $435.35

Therefore the Target Cost for maintaining the current market share and profitability is $435.35