Management at Fox Valley Machine Tool Co. is considering the development of a new automated drill press called the AutoDrill. After conferring with the design engineers, the controller’s staff assembled the following data about this product:

Target selling price .............$7,500 per unit

Desired profit percentage ...........25% of total unit cost

Projected unit demand ...........4,500 Units

Activity-based cost rates

Materials handling .............5% of direct materials and purchased parts cost

Engineering ................$300 per unit for AutoDrill

Production and assembly ..........$50 per machine hour

Delivery ................$570 per unit for AutoDrill

Marketing ...............$400 per unit for AutoDrill

Per-unit data

Direct materials cost ...........$1,620

Purchased parts cost ............$840

Manufacturing labor

Hours ..................6

Hourly labor rate .............$14

Assembly labor

Hours ..................10

Hourly labor rate .............$15

Machine hours .............30

1. Compute the product’s target cost.

2. Compute the product’s projected unit cost based on the design engineers’ estimates.

3. Should management produce and market the AutoDrill? Defend your answer.