Question

Target Costing Oregon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 5,000 log-splitting machines per year at a retail price of $600 each. An independent catalog company would handle sales for an annual fee of $2,000 plus $60 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $110 per unit. If company management desires a return equal to 10 percent of the final selling price, what is the target conversion and administrative cost per unit? Round answer to the nearest cent.

Answer 1

		($)
Sales Value	(5,000*$ 600)	30,00,000
LESS: Cost
Catalog company annual fees		2,000
Catalog company Variable fee	(5,000*$ 60)	3,00,000
Cost of Raw materials	(5000*110)	5,50,000
Profit Excluding Conversion and Admin Cost		21,48,000
Desired return
(10 percent of the final selling price)	(10% of 30,00,000)	3,00,000
So, Target Conversion and Admin Cost		18,48,000
Target Conversion and Admin Cost/Unit		(18,48,000 / 5000units) $ 370