Question

EagleEye Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. EagleEye Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs to correctly assess its ability to compete. The market price for this binocular style is well established at $137 per unit. EagleEye has enough square footage in its plant to accommodate the new production line, although several pieces of new equipment would be required; their estimated cost is $4,800,000. EagleEye requires a minimum ROI of 14% on any product line investment and estimates that if it enters this market with its digital binocular product at the prevailing market price, it is confident of its ability to sell 18,000 units each year.

a. Identify the costs that EagleEye Company would consider for decision of entering the digital binocular market. (Select all that apply.)

Raw materials and direct labor.

Branch manager's salary.

Design and engineering costs.

Variable overhead and new fixed overhead costs.

Facility costs.

b. Calculate the target cost per unit for entry into the digital binocular market. (Round your answer to 2 decimal places.)

Answer 1

a) The relevant cost for the decision will be the cost which will incur due to the given new investment. The EagleEye Company would consider the following costs for decision of entering the digital binocular market.

Raw materials and direct labor = It is variable cost and incurred due to production of binoculars.

Design and Engineering costs = It will be specifically incurred for new investment.

Variable overhead and new fixed overhead costs = Relevant cost

Branch manager's salary and facility costs will not be relevant cost.

b) Desired return on new investment = Estimated cost*Minimum ROI

= $4,800,000*14% = $672,000

Required profit per unit = $672,000/18,000 units = $37.33 per unit

Target cost per unit = Market price - Required profit

= $137 - $37.33 = $99.67 per unit.

Therefore, the target cost per unit for entry into the digital binocular market is $99.67 per unit.