Group # 3

Name: Lucy Van,

NOTE: Please fill out group info above, complete and submit the
assignment by the due date for both attendance and in-class
credit. Save file as "Group X_Ch13". One submission per group.
Including only participating group members' name (first, last) for
fair grading.
13-27 Value engineering, target pricing, and target costs. Westerly Cosmetics manufactures
and sells a variety of makeup and beauty products. The company has developed its own patented
formula for a new anti-aging cream The company president wants to make sure the product is
priced competitively because its purchase will also likely increase sales of other products. The
company anticipates that it will sell 400,000 units of the product in the first year with the following
estimated costs:

Product design and licensing $1,700,000

Direct materials 4,000,000
Direct manufacturing labor 1,600,000
Variable manufacturing overhead 400,000
Fixed manufacturing overhead 2,500,000
Fixed marketing 3,000,000

Required:
1. The company believes that it can successfully sell the product for $45 a bottle. The company’s
target operating income is 30% of revenue. Calculate the target full cost of producing the
400,000 units. Does the cost estimate meet the company’s requirements? Is value engineering
needed?
2. A component of the direct materials cost requires the nectar of a specific plant in South
America. If the company could eliminate this special ingredient, the materials cost would
decrease by 25%. However, this would require design changes of $300,000 to engineer a
chemical equivalent of the ingredient. Will this design change allow the product to meet its
target cost?
3. The company president does not believe that the formula should be altered for fear it will
tarnish the company’s brand. She prefers that the company become more efficient in
manufacturing the product. If fixed manufacturing costs can be reduced by $250,000 and
variable direct manufacturing labor costs are reduced by $1 per unit, will Westerly achieve its
target cost?
4. Would you recommend the company follow the proposed solution in requirement 2 or
requirement 3?
 Cosmetics manufactures
veloped its own patented
make sure the product is
s of other products. The
st year with the following

00
00
00
00
00
00

5 a bottle. The company’s

ull cost of producing the
nts? Is value engineering

specific plant in South

he materials cost would
$300,000 to engineer a
w the product to meet its

e altered for fear it will

come more efficient in
educed by $250,000 and
will Westerly achieve its

on in requirement 2 or
Worksheet

1 Product design and licensing 1,700,000

Direct materials 4,000,000
Direct labor 1,600,000
Variable manufacturing overhead 400,000
Fixed manufacturing overhead 2,500,000
Fixed marketing 3,000,000
Total Cost (a) 13,200,000
Production units (b) 400,000
Cost per unit (a) ÷ (b) 33
Target cost per unit ( not achievable ) 32

2 Total Cost (from 1) 13,200,000

Less: Reduction in material costs 1,000,000
Add: Increase in design costs 300,000
Total costs of redesigned cream (a) 12,500,000
Production units (b) 400,000
Revised cost per unit (a) ÷ (b) 31.25
Target cost per unit ( achievable ) 32

3 Total Cost (from 1) 13,200,000

Less: decrease in fixed manufacturing costs 250,000
Less: decrease in variable manufacturing costs 800,000
Total costs of redesigned cream (a) 12,150,000
Production units (b) 400,000
Revised cost per unit (a) ÷ (b) 30
Target cost per unit ( achievable ) 32

4 It is recommended to propose solution in requirement 3, because the cost per unit of R3 is less than R2 compa
nit of R3 is less than R2 compared to the target cost per unit of 32$.
 Alternative markup b

a.

d.
Alternative markup base:
(please input data in the shaded area)

1 Projected life cycle income statement:

Selling Price Units sold Total
Revenue $ -
Variable costs: Unit VC Units produced
Month 7-12 $ -
Month 13-36 (2 yrs) -
Month 37-42 -
Total variable costs $ -

Fixed costs:
Design costs
production
marketing
distribution
Total fixed costs $ -
Life cycle operating income $ -

2 Projected life cycle income statement: 7-12 Month

Selling Price Units sold Total
Revenue $ -
Variable costs: Unit VC Units produced
Month 7-12 $ -

Fixed costs:
Design costs
production
marketing
distribution
Total fixed costs $ -
Operating income: 7-12 month $ -

Please copy worksheet 2 (7-12 month) for other periods….

Ch 10 - P3 This assignment worth 2 points

Northern Defense manufactures radar systems. It has just completed the manufacture of its first newly
designed system, RS-32. Manufacturing data for the RS-32 follow:

Required:
Use cumulative average-time learning model. Calculate the total variable costs of producing 2, 4, and 8 units.
Use incremental unit-time learning model. Calculate the total variable costs of producing 2, 3 and 4 units.
cture of its first newly

ng 2, 4, and 8 units.
2, 3 and 4 units.
Requirement 1: Cumulative Average-time Learning Model

Step 1 - Compute cumulative total labor hours

85% Learning Curve

Cumulative Average Cumulative Total

Cumulative Number Time per Unit (y): Times: Labor-
of Units (X) Labor Hours Hours
(1) (2) (3)=(1)X(2)
1 4400
2 +
4
8 +

=
Step 2 - Compute variable costs

Variable Costs of Producting

2 Units 4 Units 8Units
Direct materials $84,000 X 2; 4; 8
Direct manufacturing labor
$27 X hours in Col. 3
Variable manufacturing overhead
$13 X hours in Col. 3
Total variable costs
Requirement 2: Incremental unit-time Learning Model

Step 1 - Compute cumulative total labor hours

85% Learning Curve

Individual Unit Time Cumulative Total

Cumulative Number for Xth unit (y): Times: Labor-
of Units (X) Labor Hours Hours
(1) (2) (3)
1 4400
2 +
3* 3401
4 +

=
* Use formular y=aXb where =4400, X=3, b=-0.234465
Step 2 - Compute variable costs

Variable Costs of Producting

2 Units 4 Units 8Units
Direct materials $84,000 X 2; 3; 4
Direct manufacturing labor
$27 X hours in Col. 3
Variable manufacturing overhead
$13 X hours in Col. 3
Total variable costs

2 Units 4 Units
Incremental unit-time learning model
Cumulative average-time learning model from Req'd 1
Difference