Millennium Printers Inc. manufactures color laser printers. Model L-1819 presently sells for $200 and has a total product cost of $160, as follows:
Direct materials ...... $ 40
Direct labor ........ 80
Factory overhead ..... 40
Total ......... $160
It is estimated that the competitive selling price for color laser printers of this type will drop to $182 next year. Millennium Printers wants to establish a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:
1. Purchase a plastic printer cover with snap-on assembly. This will reduce the amount of direct labor by six minutes per unit.
2. Add an inspection step that will add nine minutes per unit of direct labor but reduce the materials cost by $7.25 per unit.
3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 28% of the factory overhead is related to running injection molding machines.
The direct labor rate is $20 per hour.
a. Determine the target cost for Model L-1819 assuming that the historical markup on product cost is maintained.
b. Determine the required cost reduction.
c. Evaluate the three engineering improvements to determine if the required cost reduction (drift) can be achieved.