Melon Limited is a medium sized technology company which sells directly to retailers. It has recently decided to launch a new Tablet computer onto the Irish market. Due to past problems with the final cost of new products, Melon Ltd has decided to operate a target costing approach for all new products. The company aims to achieve a minimum mark up of 40% on total cost on all products sold and will not accept options that do not meet this requirement.

Having conducted market research, Melon has established that retailers would be very interested in the new product. There is, however, some debate about the price that the market will take. If the price (payable to Melon) was 499, Melon would sell 65,000 units in the year, at a price of 549 sales would be 55,000 units in the year and at a price of 599 Melon could sell 50,000 units per year of a slightly altered model (see point 6).

The company has prepared the following costings:

1. Outer casing Each unit contains a casing made by an external company. Each case costs Melon Ltd 66.
2. Screen Each unit contains one specially designed screen. The cost per screen is 115 but the supplier is willing to reduce the price by 10% on all units ordered if orders exceed 55,000 units.
3. Internal components: The complex internal structure is made up of a sub-assembly. This can be purchased externally at a cost of 152. A discount of 10% on the cost of each sub-assembly can be obtained on all units purchased in excess of 57,000.
4. Unskilled Labour The casing can be mounted by unskilled labour, at a rate of 18 per hour. It is expected that 2 units will be mounted in each hour. Due to commitments to other products Melon will only have 28,000 hours available to mount the casings. If additional time is required, overtime will have to be worked, with employees being paid 24.00 per hour of overtime.
5. Skilled Labour Skilled labour, at a rate of 30 per hour is needed to assemble the sub-assembly and screen. Due to the complex nature of the task, each unit takes 90 minutes to assemble, with all assembly being done during normal working hours.
6. Additional component In order to sell units at the highest price (599) an additional component, in the form of a camera will be included in this model only. Each camera costs 34. No additional labour is required.
7. Other costs Melon estimates that the marketing costs of the new product will be driven by the type of model launched. Should the model include the camera, marketing costs will be 30,000, otherwise the cost will be 25,000.

Required:

a) Based on the information above, and assuming the product will be withdrawn after one year, advise Melon:

1. Whether they can achieve its target unit cost for each of the three alternatives considered.
2. What its total profits would be for each of the three alternatives, and
3. What price it should sell the Tablet at, explaining your reasoning.

b) Briefly outline the main arguments in favour of implementing a Target Costing system in a company.