Alexis Kunselman, president of Pharsalia Electronics (PE), is concerned about the prospects of one of its major
The situation is especially disturbing because PE had implemented an activity-based costing (ABC) system about two years ago. The ABC system helped them better identify costs, cost pools, cost drivers, and cost reduction opportunities. Changes made when adopting ABC reduced costs on this product by approximately 15 percent during the last two years. Now it appears that costs will need to be reduced considerably more to remain competitive and to earn a profit on the 10-disc car CD changers. Total costs to produce, sell, and service the CD changer units are as follows:
10-Disc Car CD Changer
Kunselman has decided to hire Donald Collins, a consultant, to help decide how to proceed. After two weeks of review, discussion, and value engineering analysis, Collins suggested that PE adopt a just-in-time (JIT) cell manufacturing process to help reduce costs. He also suggested that using target costing would help in meeting the new target price.
By changing to a JIT cell manufacturing system, PE expects that manufacturing direct labor will increase by $15 per finished unit. However, setup, material handling, inspection, and finished goods warehousing will all be eliminated. Machining costs will be reduced from $35 to $30 per unit, and warranty costs are expected to be reduced by 40 percent.
1. Define target costing.
2. Define value engineering.
3. Determine Pharsalia Electronics' unit target cost at the $300 competitive sales price while maintaining the same percentage of profit on sales as is earned on the current $350 sales price.
4. If the just-in-time cell manufacturing process is implemented with the changes in costs noted, will Pharsalia Electronics meet the unit target cost you determined in requirement (3)? Prepare a schedule detailing cost reductions and the unit cost under the proposed JIT cell manufacturing process?
Step by Step Answer: