Collaborative Learning Problem 12-37 Value engineering, target pricing, and lock
ID: 2481433 • Letter: C
Question
Collaborative Learning Problem 12-37 Value engineering, target pricing, and locked-in com. Pacific Decor, Inc.. designs, manufactures, and sells contemporary wood furniture. Ling Li is a furniture designer for Pacific. Li has spent much of Past month working on the design of a high-end dining room table. The design has been well-received by Jose Alvarez, the product development manager. However, Alvarez wants to make sure that the table can be priced competitively. Amy Hoover, Pacific's cost accountant presents Alvarez with the following cost data for the expected production of 200 tables: Design cost dollar 5,000 Direct materials 120,000 Direct manufacturing labor 142,000 Variable manufacturing overhead 64,000 Fixed manufacturing overhead 46,500 Marketing 15.000 Alvarez thinks that Pacific can successfully market the table for dollar 2,000. The company's target operating income is 10 percentage of revenue Calculate the target full cost of producing the 200 tables. Does the cost estimate developed by Hoover meet Pacific's requirements? Is value engineering needed? Alvarez discovers that Li has designed the table two inches wider than the standard size of wood normally used by Pacific. Reducing the table's size by two inches will lower the cost of direct materials by 40 percentage. However, the redesign will require an additional dollar 6,000 of design cost, and the table will be sold for dollar 1,950. Will this design change allow the table to meet its target cost? Are the costs of materials a locked-in cost? Li insists that the two inches are an absolute necessity in terms of the table's design. She believes that spending an additional dollar 7,000 on better marketing will allow Pacific to sell tho tables for dollar 2,200. If this is the case, will the table's target cost be achieved without any value engineering? Compare the total operating income on the 200 tables for requirements 2 and 3. What do you recommend Pacific do, based solely on your calculations? Explain briefly.Explanation / Answer
1. CALCULATON OF OPERATING INCOME:
Sales (200 tables x $2,000) 400,000
Less: Expenses:
Direct Materials 120,000
Direct Manufacturing labour 142,000
Design cost 5,000
Variable Manufacturing Overhead 64,000
Fixed Manufacturing overhead 46,500
Marketing 15,000 392,500
Income 7,500
. Income 50,500
No, target cost cannot be achieved without any value engineering:
4. Operating income in option 2 $39,500
Operating income in opiton 3 50,500