4. Speedo Limited is a specialist car manufacturer that produces various models of cars. The organization...

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4. Speedo Limited is a specialist car manufacturer that produces various models of cars. The organization is due to celebrate its 100th anniversary next year. To mark the occasion, Speedo Limited intends to produce a sports car, the Model Royal. As this will be a special edition, production will be limited to 1,000 numbers of Model Royal Cars. Speedo Limited is considering using a target costing approach and has conducted market research to determine the features that consumers require in a sports car. Based on this market research and knowledge of competitor's products, company has decided to price the Model Royal at Rs 9.75 Lacs. Company requires an operating profit margin of 25% of the selling price of the car. Details for the forthcoming year are as follows: Forecast of direct costs of Model Royal Car Labour Rs 2,50,000; Material Rs 4,75,000 Forecasts of annual overhead costs: Rs in Lacs Production Line Cost Transportation Cost 2310 900 Cost Drivers See Note 1 See Note 2 Note 1 The production line that would be used for Model Royal has a capacity of 60,000 machine hours per year. The production line time required for Model Royal is 6 machine hours per car. This production line will also be used to make other cars and will be working at full capacity. Note 2 Some models of cars are delivered to showrooms using car transporters. 60% of the transportation costs are related to the number of deliveries made. 40% of the transportation costs are related to the distance travelled. The car transporters have forecast to make a total of 640 deliveries in the year and carry 10 cars each time. The car transporter will always carry its maximum capacity of 10 cars. The total annual distance travelled by car transporters is expected to be 2,25,000 kms. 50,000 kms of this is for the delivery of Model Royals car only. All 1,000 Model Royal cars that will be produced will be delivered in the year using the car transporters. Required (i) Calculate the forecast total cost of producing and delivering a Model Royal car using Activity Based Costing principles to assign the overhead costs. (ii) Calculate the cost gap that currently exists between the forecast total cost and the target total cost of a Model Royal car. (6+6) 4. Speedo Limited is a specialist car manufacturer that produces various models of cars. The organization is due to celebrate its 100th anniversary next year. To mark the occasion, Speedo Limited intends to produce a sports car, the Model Royal. As this will be a special edition, production will be limited to 1,000 numbers of Model Royal Cars. Speedo Limited is considering using a target costing approach and has conducted market research to determine the features that consumers require in a sports car. Based on this market research and knowledge of competitor's products, company has decided to price the Model Royal at Rs 9.75 Lacs. Company requires an operating profit margin of 25% of the selling price of the car. Details for the forthcoming year are as follows: Forecast of direct costs of Model Royal Car Labour Rs 2,50,000; Material Rs 4,75,000 Forecasts of annual overhead costs: Rs in Lacs Production Line Cost Transportation Cost 2310 900 Cost Drivers See Note 1 See Note 2 Note 1 The production line that would be used for Model Royal has a capacity of 60,000 machine hours per year. The production line time required for Model Royal is 6 machine hours per car. This production line will also be used to make other cars and will be working at full capacity. Note 2 Some models of cars are delivered to showrooms using car transporters. 60% of the transportation costs are related to the number of deliveries made. 40% of the transportation costs are related to the distance travelled. The car transporters have forecast to make a total of 640 deliveries in the year and carry 10 cars each time. The car transporter will always carry its maximum capacity of 10 cars. The total annual distance travelled by car transporters is expected to be 2,25,000 kms. 50,000 kms of this is for the delivery of Model Royals car only. All 1,000 Model Royal cars that will be produced will be delivered in the year using the car transporters. Required (i) Calculate the forecast total cost of producing and delivering a Model Royal car using Activity Based Costing principles to assign the overhead costs. (ii) Calculate the cost gap that currently exists between the forecast total cost and the target total cost of a Model Royal car. (6+6)