Clean Pest Control Ltd. (CPC) offers cleaning services to all industrial customers to meet their pestcontrol problems. Their customers range from small offices blocks to large factories, where specialist pest-control equipment must be used and local regulations have to be met. The company offers mostly regular service contracts on an annual basis with 4 visits in a year and sometimes one-off contracts are also handled when requested. 

The pest control services market has been very competitive lately and CPC Ltd contract prices of services are usually based on full cost-plus approach. With the recent increase in the cost of all materials and labor rates, CPC Ltd is forced to revise its contract pricing and this has resulted in losing several long-standing customers to their competitors.  

The CEO of CPC Ltd had heard about target costing approach in a recent seminar and is considering whether it could be used by them to stay competitive and not to lose any more customers. A market survey on industrial pest control services has suggested a competitive market price of $1,300 per industrial contract. The profit mark-up is 30%.

Cost information on their regular industrial cleaning contract on an annual basis are given below:

Material – chemical Ox                                                             $350.00 per contract

Material - Odorless Liquid                                                        $200.00 per contract

Labor                                                                                           5 hours per visit

Transportation                                                                           $60.00 per visit

Variable Overheads                                                                   130% of labor costs                                                                     

Fixed Overheads                                                                        160% of labor costs                                                         

Additional Information:

All materials are bought from the same supplier who charges delivery charges separately and not shown in the purchase invoice. The delivery charges are approximately 8% of the material cost and this was not accounted for in the above figures.

The labor charges will need to be revised since the cost of living is higher. The current labor rate is $20 per hour and this is expected to increase by 10% for all future contracts.

 

Required:

a. Assess the information given above and ascertain the cost gap.   

b. Suggest THREE (3) ways to close the cost gap

c. Discuss TWO (2) difficulties which may be encountered and TWO (2) benefits which may arise when implementing target costing at CPC Ltd.   

Answer rating: 100% (QA)

1 Calculation of cost Material 350 Material 200 Delivery charge 44 Labour 225 110 Variable overhe... View the full answer