Answer :
a) The target cost for Model J20, assuming that the historical markup on product cost and selling price is maintained, is $200 per unit.
b) The required cost reduction per unit is $30 per unit ($230 - $200).
c) An evaluation of the three engineering improvements together to determine if the required cost reduction (drift) can be achieved as follows:
While the calculated cost reduction, including direct materials, is $25, the required reduction to achieve the target markup cost is $30.
Thus, the expected target cost reduction does not add up with the calculated cost reduction, envisaged by the engineers.
Data and Calculations:
Model J20 Selling price per unit = $460
Direct materials $175
Direct labor 40
Factory overhead 15
Total $230
Direct labor rate = $30 per hour
Direct labor rate per minute = $0.50 ($30/60)
Direct labor hours per unit = 1¹/₃ hours ($40/$30) or 80 minutes
Direct labor hours per unit reduction:
Normal direct labor time = 80 minutes
Plastic printer cover = -15 minutes
Total new direct labor time = 65 minutes
Direct labor rate per unit = $32.50 ($0.5 x 65)
Additional inspection time = 6 minutes
Injection molding machine = 1 minute
Direct materials cost = $155 ($175 - $20)
Historical markup = 200% ($460/$230 x 100)
Target cost based on historical markup = $200 ($400 x 100/200)
Required cost reduction per unit is $30 per unit ($230 - $200)
1. Direct labor reduction of $7.50 per unit ($40 - $32.50)
2. Additional inspection $3 per unit (6 x $0.50)
3. Injection molding productivity improvement $0.50 per unit
4. Material cost reduction = $20
Total savings are $25 per unit ($7.50 - $3 + $0.50 + $20).
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