Sparrows Specialty Products makes a wide variety of specialty home products. Joey Sparrow, the owner, has recently decided to add a special type of wine opener—one with a granite base that can be etched with the owner’s initials—to his line. It will also have a long metal “neck” with an elaborate cork-pulling mechanism. While his will be a novelty item, there are competitive corkscrews ranging anywhere from the $2.50 simple plastic model to very elaborate one- touch devices that can sell for $250 or more. He decides he wants to keep his price below $200. He and his engineering team gather the following information for the first part of the establishment phase:

• Target price: $200

• Target profit: 25%

• Granite base: $20

• Etching: $5 labor, $10 overhead

• Metal neck: $15 plus $2 labor and $4 overhead to mount it

• Cork-pulling mechanism: $75 materials, $25 labor, $50 overhead

The cost after the first round of analysis is simply too high. Joey puts his design team to work looking for alternatives. They come up with the following suggestions:

• Buy the cork-pulling mechanism from an Italian manufacturer for $80. It will still cost $10 labor and $20 in overhead to mount the device.

• Substitute a high-level polymer for the granite base. The polymer could still be etched. It would cost $8. It would need to be weighted to hold the cork-pulling head. The weighting would cost an additional $4. The labor and overhead costs would remain.

• Charge for the etching to recover cost. Fewer people would choose etching, so labor would be idled. This might make the product less desirable overall.

• Buy a new etching machine. Labor would drop to $1 with only $2 in overhead. The machine costs $5,000 and could be used on other products. Machine cost is $1 for each etching.

REQUIRED:

a. Develop the target cost for the product.

b. Compute the current cost gap.

c. Choose among the options the design team has identified to close the cost gap.

d. Do you have any concerns about the value proposition of any of these options? In other words, could they turn customers off ?