Taiseki Engineering Ltd. manufactures specialized engineering products. The items produced are of high quality but are fragile by nature and therefore the packaging process must be carried out with some care.

The company’s product development staff recently completed design work on a new product (the Pump). Comparison with competitors’ products indicates that $20 per unit is a realistic selling price for the Pump. The company requires a 35% margin on selling price from all products in order to ensure an adequate companywide return on investment. Production and sales of Pump are estimated at 13,000 units per annum.

According to the design specifications, the Pump is to be produced in batches of 500 units and packaged in batches of 25 units. Overhead costs amount to $2000 for each batch of 500 units produced and a further $125 for each batch of 25 units packaged.

The design specifications also indicate that the manufacture of each unit of Pump will require 3 units of Component 1 and 5 units of Component 2. Component 1 is a new item which Taiseki Engineering Ltd. will have to manufacture at a cost of $0.20 (variable) each plus $4,000 for each batch of 10,000 units of this component.

Component 2 is used regularly by the company and can be purchased in any desired quantity from a reliable supplier for $0.55 each. The labour cost of fitting these components in the manufacture of Pump is estimated at $0.45 per unit of Component 1 and $0.15 per unit of Component 2.

 REQUIREMENT:

(a) Prepare calculations to indicate whether Taiseki Engineering Ltd. will achieve the target cost for the Pump on the basis of the data provided. (9 marks)

(b) Now assume that a “target costing task force” has suggested the following changes in order to help reduce the cost of the Pump:

_ Increase the production batch size so that each year’s total output of Pump would be produced in just 24 batches;

_ Increase the packaging batch size to 75 units of Pump;

_ Modify the design of the Pump, such that 2 units of Component 1 would be replaced by the same number of units of Component 2 in each Pump.

Calculate the total annual cost savings if all of these changes are implemented, and indicate whether the target cost would be achieved. (10 marks)

(c) The Managing Director points out that no consideration has been given to the cost of delivering the product to customers. Discuss whether the company needs to give consideration to delivery costs as part of the target costing exercise. (N.B. Calculations are not required in your answer to this part). (6 marks)

Answer rating: 100% (QA)

a Calculations to indicate whether Taiseki Engineering Ltd will achieve the target cost for the Pump on the basis of the data provided Unit Selling Pr... View the full answer