Question

22) Rodgers Inc. is launching a new product that will offer to sell for $25 per unit according to intensive marketing research study. Annual demand is estimated to be 70,000 units. Rodgers estimates that using current manufacturing technology, it can manufacture the units for $23 per unit, but if it purchases a new machine, the units can be manufactured for $22 per unit. Rodgers has a target profit of 20% return on sales.

Now, how would Rogers be able to make this target cost of one of the following:
A. raise up the prices to get the 20% profit
B. Give the marketing research team an assignment to get the price right
C. talk to other departments like production and see if they could find a lower product cost to get to an acceptable profit rate.
D. Drop the product as it would never make the target profit.

Answer 1

Sales price is $25 per unit.

Cost per unit with current machinery is $23.

Cost per unit with new machinery is $22.

Calculation of target cost

Required profit is 20% on sales i.e 20% of $25 = $5

Target Cost = $25-$5= $20.

Now,Consider the options available

A.) In target costing price can't be raised. Due to some factors. For example - Competetion.

B.) Already intensive marketing research study has been conducted.

C.) Cost per unit has been already determined. In fact cost with old machinery and with new machinery has been determined by the management. That must be determined after discussion with all departments.

D.) So last option with co. is to drop the product as it would never make the target profit.

Company can earn maximum $2 per unit on 70,000 units.