Excel Ltd make and sell two products, VG4U and VG2. Both products are manufactured through two consecutive processes - making and packing. Raw material is input at the commencement of the making process. The following estimated information is available for the period ending 31 March:
(i)

Forty per cent of fixed costs are product specific, the remainder are company fixed costs. Fixed costs will remain unchanged throughout a wide activity range.
(ii)

iii) Conversion costs are absorbed by products using estimated time based rates.
Required:
(a) Using the above information,
(i) Calculate unit costs for each product, analyzed as relevant.
(ii) Comment on a management suggestion that the production and sale of one of the products should not proceed in the period ending 31 March.
(b) Additional information is gathered for the period ending
31 March as follows:
(i) The making process consists of two consecutive activities, moulding and trimming. The moulding variable conversion costs are incurred in proportion to the temperature required in the moulds. The variable trimming conversion costs are incurred in proportion to the consistency of the material when it emerges from the moulds. The variable packing process conversion costs are incurred in proportion to the time required for each product. Packing materials (which are part of the variable packing cost) requirement depends on the complexity of packing specified for each product.
(ii) The proportions of product specific conversion costs (variable and fixed) are analyzed as follows: Making process: moulding (60 per cent); trimming (40 per cent) Packing process: conversion (70 per cent); packing material (30 per cent
(iii) An investigation into the effect of the cost drivers on costs has indicated that the proportions in which the total product specific conversion costs are attributable to VG4U and VG2 are as follows:

(iv) Company fixed costs are apportioned to products at an overall average rate per product unit based on the estimated figures.
(c) Comment on the relevance of the amended unit costs in evaluating the management suggestion that one of the products be discontinued in the period ending 31 March.
(d) Management wish to achieve an overall net profit margin of 15 per cent on sales in the period ending 31 March in order to meet return on capital targets.
Required:
Explain how target costing may be used in achieving the required return and suggest specific areas of investigation.

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Making Packing (£000) (£000) Conversion costs: Variable Fixed 350 210 280 140 Product information: VG4U VG2 Production time per unit: Making (minutes) Packing (minutes) Production sales (units) Selling price per unit (E) Direct material cost per unit (E) 5.25 5.25 6 5000 150 30 4 3000 180 30 VG4U VG2 Temperature (moulding) Material consistency (trimming) Time (packing) Packing (complexity) 2 2 3 1 5 2 3