The following costs pertain to Pyramid Printing Company, a U.S. producer of retail inserts and magazines for
Question:
The following costs pertain to Pyramid Printing Company, a U.S. producer of retail inserts and magazines for July 2015, during which it will print 40,000,000 copies of a retail insert.
Pyramid Printing Company | Jul-15 |
Printing design and engineering costs | $100,000 |
Raw materials | 180,000 |
Direct labor | 120,000 |
Variable manufacturing overhead | 60,000 |
Factory insurance | 50,000 |
Depreciation — machinery and facility | 125,000 |
Repairs and maintenance — facility | 25,000 |
Selling, marketing and distribution expenses | 300,000 |
The company has a target cost proposed by a major customer of $5.00 per 100 copies. The expected gross margin is 60% of sales.
Requirements:
Determine whether the company is able to achieve its target cost per the schedule above and given the sales price indicated. Indicate whether it must employ value engineering.
Pyramid’s purchasing manager calls their paper supplier and negotiates a 30% price decrease for raw materials. Henry Russell, the company’s sales manager, indicates that he will cut the selling, marketing, and distribution expenses in order to reach the required target cost, given the above. If the cost of raw materials decreases by 30%, how much must the selling, marketing, and distribution expenses decrease in order to meet the required target cost?
Summarize your findings by commenting on the analysis. What other considerations apply to target costing analysis?
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young