Timberland is considering manufacturing special crates to be used for shipping new mainframe computers. The company is working with a computer manufacturer who is thinking of using the new crates as a standard component for shipping their computers. Timberland's marketing manager has determined that mainframe computer buyers would be willing to pay $110 for a crate. Timberland's packaging and assembly cost for each new crates is $25.
Research conducted jointly by the computer maker and Timberland's marketing personnel shows that customers want six features. These are: (1) durability, (2) ease of packing, (3) protection from damage (4) ease of use (5) compatibility with most brands of mainframes, and (6) ability to reuse the crates.
Based on this research, Timberland's engineers have come up with a design that uses four main production modules or processes. Each process has several major sub-processes. A list of the major processes, together with preliminary cost estimates (includes all labor, material and overhead) for manufacturing or buying each process, appears in Table 1 below.
In addition to the above, the marketing department estimates that order filling (primarily order processing and delivery) costs would run $4.00 per unit. General and administrative costs are expected to be $14.00 a unit. Timberland expects to earn a 15 percent return on the selling price.
Assume that each process would absorb any necessary cost reductions proportionately to the total costs of all the processes (exclude packaging and assembly, order filling costs and general and administrative costs since it has been determined that these costs can not be reduced.)
Process Estimated Current Costs
Total Costs $72.00
Prepare a schedule showing the target cost that must be achieved to earn the required 15% return. Please show all computations.
The tutorial is in Excel, and the strategy for Timberland to use to identify the target cost required for a 15% return is provided.