Clevenger Machine Tool Company designs and produces a line of high-quality machine tools and markets them throughout the world. Its main competition comes from French, British, and Korean companies. Five competitors have recently introduced two highly specialized machine tools, Y14 and Z33. The prices charged for Y14 range from $625 to $675 per tool, and the price range for Z33 is from $800 to $840 per tool. Clevenger is contemplating entering the market for these two products. Market research has indicated that if Clevenger can sell Y14 for $650 per tool and Z33 for $750 per tool, it will be successful in marketing the products worldwide.

The company’s profit markup is 25 percent over all costs to produce and deliver a product. Current activity-based cost rates are as follows:

Materials ..............$1.30 per dollar of direct materials and handling purchased parts cost

Production .............$4.40 per machine hour

Product delivery ..........$34.00 per unit of Y14

$40.00 per unit of Z33

Design engineering and accounting estimates for the production of the two new products are as follows:

Required
1. Compute the target cost for each product.
2. Compute the total projected unit cost of producing and delivering each product.
3. Using target costing, decide whether the products should beproduced.

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Product Y14 75,000 Product Z33 95,000 Projected unit demand Per-unit data Direct materials cost Purchased parts cost Manufacturing labor $50.00 $65.00 $60.00 $70.00 Hours Hourly labor rate $14.00 $14.00 Assembly labor Hours Hourly labor rate 4.6 $12.00 9.2 $12.00 16 Machine hours