Helot Co. develops and sells computer games. It is well known for launching innovative and interactive role-playing

Question:

Helot Co. develops and sells computer games. It is well known for launching innovative and interactive role-playing games and its new releases are always eagerly anticipated by the gaming community. Customers value the technical excellence of the games and the durability of the product and packaging.
Helot Co. has previously used a traditional absorption costing system and full cost plus pricing to cost and price its products. It has recently recruited a new finance director who believes the company would benefit from using target costing. He is keen to try this method on a new game concept called Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out customers’ opinions on the new game concept and to access potential new games offered by competitors. The results were used to establish a target selling price of $45 for Spartan and an estimated total sales volume of 350,000 units. Helot Co. wants to achieve a target profit margin of 35 percent.
The finance director has also begun collecting cost data for the new game and has projected the following:

Required:

(a) Which of the following statements would the finance director have used to explain to Helot Co.’s board what the benefits were of adopting a target costing approach so early in the game’s life cycle?

1 Costs will be split into material, system, and delivery and disposal categories for improved cost reduction analysis.

2 Customer requirements for quality, cost and timescales are more likely to be included in decisions on product development.

3 Its key concept is based on how to turn material into sales as quickly as possible in order to maximize net cash.

4 The company will focus on designing out costs prior to production, rather than cost control during live production.
a. 1, 2 and 4
b. 2, 3 and 4
c. 1 and 3
d. 2 and 4 only

(b) What is the forecast cost gap for the new game?
a. $2.05
b. $0.00
c. $13.70
d. $29.25

(c) The board of Helot Co. has asked the finance director to explain what activities can be undertaken to close a cost gap on its computer games
Which of the following would be appropriate ways for Helot Co. to close a cost gap?
1 Buy cheaper, lower grade plastic for the game discs and cases.
2 Using standard components wherever possible in production.
3 Employ more trainee game designers on lower salaries.
4 Use the company’s own online gaming websites for marketing.
a. 1, 2 and 3
b. 1, 3 and 4
c. 2 and 4
d. 2 and 3 only

(d) The direct labour cost per unit has been based on an expected learning rate of 90 per cent, but now the finance director has realized that a 95 per cent learning rate should be applied.
Which of the following statements is true?
a. The target cost will decrease and the cost gap will increase.
b. The target cost will increase and the cost gap will decrease.
c. The target cost will remain the same and the cost gap will increase.
d. The target cost will remain the same and the cost gap will decrease.

(e) Helot Co. is thinking of expanding its business and introducing a new computer repair service for customers.

The board has asked if target costing could be applied to this service.
Which of the following statements regarding services and the use of target costing within the service sector is true?
a. The purchase of a service transfers ownership to the customer.
b. Labour resource usage is high in services relative to material requirements.
c. A standard service cannot be produced and so target costing cannot be used.
d. Service characteristics include uniformity, perishability and intangibility.