QUESTION 3 - TARGET COSTING 25 marks Target Costing The company assembles and sells many types of GPS systems. It is considering extending its product range to include GPS systems for electrical cars. These systems give better feedback to the drivers and have a large number of additional features not possible with the previous technologies. A GPS system is produced by assembly workers assembling a variety of components, Production overheads are currently absorbed into product costs on an assembly labour hour basis The company is considering a target costing approach for its new GPS system. The following data is available. Selling price per unit 44 Profit margin anticipated 18% This price is thought to be competitive with a similar GPS on the market that has comparable features to the new system. Management have agreed that the acceptable margin will be as stated above. Cost information for the new GPS systemis as follows Component 1 - these are purchased at a cost of $ 4.50 each They are bought in batches of 3500 units Delivery cost per batch /$ 2.800 per batch Component 2 Quantity required per unit (in meters) 0.05 Expected quantity to be wasted 3% Cost per meter of component 2 ($) 0.75 per meter Other materials Cost per GPS system ($) 7.5 per system Assembly labour Time to assemle one GPS unit 40 minutes Pay rate to staff 12.50 per hour Production overheads Total production Total assembly overheads labour hours Month 1 650,000 18,000 Month 2 700,000 28,000 Fixed production overheads are absorbed on an assembly hour basis on normal annual activity levels, Assemby hours worked by staff in one year 250,000 hours INB. You will need to use High Low method to separate the production over heads into fixed and variable costs in order to determine a variable rate and a fixed rate.] Required (a) Calculate the expected cost per unit of the GPS system and identify any cost gaps. 13 marks (b) State two ways that this company can used to eliminate an existing cost gap 2 marks (c ) The product is expected to have a life cycle of five years based on the speed at which technology is changing Identify the five stages of life cycle costing and give one example of the type of costs that could fall in each of those five stages. 10 marks