PBB is a toy manufacturer and retailer. PBB sells toys to consumers through its large network of retail outlets in its home country and via the company’s website.
PBB purchases the materials and components that it needs to manufacture toys from a number of different suppliers. All of the purchases are delivered to PBB’s raw material store at its factory and are held there until they are needed for production.
Finished toys are transported from the factory to PBB’s retail outlets by PBB’s fleet of vehicles. The vehicles follow the same schedule each week irrespective of the load they are carrying.
Finished toys that are destined for sale via the company’s website are transported to PBB’s distribution centre.
PBB has recently won the contract to manufacture and sell a new toy. The new toy, Toy Z, is a doll based on a character from a very popular international children’s film. PBB is free to set the selling price of Toy Z as it sees fit, but must pay a royalty fee of 15 percent of the selling price to the film company. PBB intends to sell Toy Z through its network of retail outlets.

PBB plans to adopt a target costing approach for Toy Z. Market research has determined that the selling price will be $25 per Toy Z. PBB requires a profit margin of 25 percent of the selling price of Toy Z.
The forecast costs per Toy Z are:

...................................................................................................$
Component A .....................................................................2.15
Component B .....................................................................1.75
Other materials ..........................See note below for additional information
Labour (0.4 hours at $15 per hour) .................................6.00
Product-specific production overhead cost ...................1.89
Product-specific selling and distribution cost .................2.38

Each Toy Z requires 0.6 kg of ‘other materials’. These ‘other materials’ are purchased from a supplier at a cost of $4 per kg and 4 percent of all materials purchased are found to be substandard.

Required:
(a) Calculate the cost gap that exists between the forecast total cost per unit and the target cost per unit of Toy Z.
(b) Discuss how PBB could reduce costs in THREE primary activities in its value chain.