DBU Systems manufactures testing equipment for the communications industry. In developing a new device for maritime communication, the design group has estimated the following unit costs.

Metal .................................$20
Plastic ..................................12
Direct labor hours ............1.2

Direct labor at DBU Systems earns $20 per hour. Overhead is estimated for new products at 150 percent of direct labor. DBU Systems has target operating margin of 20 percent (as a percentage of costs) on this type of product. The marketing team has estimated that a price of $100 is expected for the device.

Required
a. Will DBU Systems achieve the target operating margin for this product?
b. The product manager tells you that the company is considering changing the way it estimates overhead. The alternative approach will estimate overhead at 75 percent of direct material cost. She suggests that the alternative be used for this product, because “the company will probably change the method soon.” Under the alternative method of calculating overhead, will DBU Systems achieve the target operating margin for this product?