Smith Industries produces bicycle tires. It has just been approached by a major producer of bicycles to have a new type of tire produced that would be branded by the customer, who would sole source the tire. It is estimated that the firm would use 300,000 tires over three years. The customer is willing to pay Smith $10 per tire because of its added features. Smith would like to earn 30% on this order. It projects the following costs:

• Development costs: $120,000 for the entire sale

• Machine acquisition: $300,000 for the entire sale

• Raw materials: $3 per tire

• Direct labor: $1.50 per tire

• Overhead: $0.75 per tire

• Shipping and distribution costs: $1 per tire

• Customer service costs: $75,000

REQUIRED:

a. What is the target cost for this product?

b. If the firm produces the way it intends, can it make its target margin?