Company $mathrm{S}$ is a specialist car manufacturer and intends to produce a new, limited edition 'Compact Executive'

Question:

Company $\mathrm{S}$ is a specialist car manufacturer and intends to produce a new, limited edition 'Compact Executive' car in 2016. The car will be called the $\mathrm{S} 2016$. The production will be limited to 1,000 units of the S2016 car.

Company $\mathrm{S}$ is considering using a target costing approach and has conducted market research to determine the features that consumers require in a car of that type. Based on this market research and knowledge of competitors products, Company $S$ has decided to price the $\mathrm{S} 2016$ at $\$ 19,950$. Company $\mathrm{S}$ requires an operating profit margin of $$25$ \%$ of the selling price of the car. Company S uses activity-based costing principles to assign overhead costs to units of production, and details for the forthcoming year are as follows:

Forecast direct costs for a $\mathbf{S 2 0 1 6}$ car: Labour $\$ 5,000$, Material $\$ 9,500$.

Forecast annual overhead costs: Production line costs $\$ 4,630,000$ (see note 1) and transportation costs $\$ 1,800,000$ (see note 2 ).

Note 1: The production line that would be used for $\mathrm{S} 2016$ has a capacity of 60,000 machine hours per year. The production line time required for one S2016 is 6 machine hours per car. This production line will also be used to make other cars and will be working at full capacity.

Note 2: Some models of cars are delivered to showrooms using car transporters. $$40$ \%$ of the transportation costs are related to the distance travelled.

The car transporters are forecast to make a total of 640 deliveries in the year, and carry 10 cars each time. The car transporter will always carry its maximum capacity of 10 cars.
The total annual distance travelled by car transporters is expected to be $$225$,000 \mathrm{kms} .50,000 \mathrm{kms}$ of this is for the delivery of the $\mathrm{S} 2016$ only. All 1,000 S2016 cars that will be produced will be delivered in the year using the car transporters.

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