Question Three Egvenny Ltd is proposing to launch a new dessert aimed at those who enjoy sweet-tasting food, but who are also very health-orientated. This is a dessert which is expected to sell well if competitively priced, but the company's Directors are realistic enough to understand that its useful life on the market is likely to be four years only, as technological advancements mean that new food products of this type appear regularly. The Managing Director is aware that the company needs a more externally focussed strategy in order to remain competitive. At the next meeting of the Board of Directors, she is therefore going to propose that a target costing should be implemented immediately at the beginning of the product's life and continuing throughout the forecast four-year life of the product. The Managing Director is concerned that the Board will be have worries about the disruption to processes and pressure on staff from the implementation of target costing, and that the Board will need to be convinced of the benefits of introducing target costing. The Managing Director has been have asked for your help in doing this, and she has provided you with the following information about the new dessert: e Unit sales forecast: 3,000,000 desserts in total over the four years; e Unit selling price 2.20 per dessert; e Average working capital per annum - take 3 months of average annual sales value; e The desserts will be made using a special piece of equipment costing 400,000 which will have a residual value of 80,000 at the end of its four-year life; e Average investment is defined as average working capital plus average fixed capital; The required return on capital investment is 14%; Annual fixed costs are 450,000. Required (a) Define target costing. (2 marks) (b) Explain to the Managing Director of Egvenny Ltd the benefits of implementing of a target costing system at the earliest possible stage in the life of a product. (10 marks) (b) Determine the target variable cost per dessert for Egvenny Ltd. (13 marks)