Best Cost Corporation has an aggressive research and development (R&D) program and uses target costing to aid in the final decision to release new products to production. A new product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique features will generate a total demand of 50,000 units at an average price of $230. Design and production engineering departments have performed a value analysis of the product and have determined that the total cost for the various value-chain functions using the existing process technology are as follows:
Value-Chain Function . Total Cost over Product Life
Research and Development .... $ 1,500,000
Design .............. 750,000
Manufacturing .......... 5,000,000
Marketing .............. 800,000
Distribution ............ 1,200,000
Customer Service ........... 750,000
Total Cost over Product Life .... $10,000,000

Management has a target profit percentage of 20% of sales. Production engineering indicates that a new process technology can reduce the manufacturing cost by 40%, but it will cost $1,100,000.
1. Assuming the existing process technology is used, should the new product be released to production? Explain.
2. Assuming the new process technology is purchased, should the new product be released to production? Explain.

  • CreatedNovember 19, 2014
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