Tera Equipment manufactures and sells electrical appliances for home use. It has developed a new portable...

Transcribed Image Text:

Tera Equipment manufactures and sells electrical appliances for home use. It has developed a new portable induction cooker. The project team is evaluating the new product before it is released into production. The company uses target costing to evaluate all its products. The market survey indicated that there is potential for this product and the company believes that it would generate a demand of 65,000 units at an average selling price of RM 340.00 per unit. The production team has performed a value analysis of this product and has compiled the following cost over the life cycle of the product: Cost elements: Research and development cost Design cost Production cost Marketing cost Logistic and distribution cost Customer service Total life cycle cost Total Life Cycle Cost (RM) 2,125,000 1,575,000 7,350,000 1,155,000 1,942,500 997,500 15,145,000 The company has set a target profit percentage of 35% of sales. The production team has indicated that a new manufacturing process, if implemented, can reduce the production cost by 45%. However, the new production process would cost RM 2,137,500. Required: 1. Based on the existing total life cycle cost, should the product be released to production? Show computations and explain your answer. (8 marks) 2. Assuming that the new production process is purchased and implemented, should the new product be released to production? Show computations and explain your answer. (5 marks) Tera Equipment manufactures and sells electrical appliances for home use. It has developed a new portable induction cooker. The project team is evaluating the new product before it is released into production. The company uses target costing to evaluate all its products. The market survey indicated that there is potential for this product and the company believes that it would generate a demand of 65,000 units at an average selling price of RM 340.00 per unit. The production team has performed a value analysis of this product and has compiled the following cost over the life cycle of the product: Cost elements: Research and development cost Design cost Production cost Marketing cost Logistic and distribution cost Customer service Total life cycle cost Total Life Cycle Cost (RM) 2,125,000 1,575,000 7,350,000 1,155,000 1,942,500 997,500 15,145,000 The company has set a target profit percentage of 35% of sales. The production team has indicated that a new manufacturing process, if implemented, can reduce the production cost by 45%. However, the new production process would cost RM 2,137,500. Required: 1. Based on the existing total life cycle cost, should the product be released to production? Show computations and explain your answer. (8 marks) 2. Assuming that the new production process is purchased and implemented, should the new product be released to production? Show computations and explain your answer. (5 marks)

Answer rating: 100% (QA)

1 Based on the existing total life cycle cost To determine if the product should be released to production we need to calculate the target cost per un... View the full answer