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Baker Plumbing Fixtures: Target Costing

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Target Cost

Baker Plumbing Fixtures is developing a preplumbed acrylic shower unit. The team developing the product includes representatives from marketing, engineering, and cost accounting. To date, the team has developed a set of features that its plans on incorporating in the unit, including a seat, two shower heads, four body sprays, and a steam unit. With this set of features, the team believes that a price of $5,000 will be attractive in the marketplace. Baker seeks to earn a per unit profit of 30 percent of selling price.

b. The team estimated that the fixed production costs associated wit the product will be $2,000,000 and variable costs to produce and sell the item will be $2,500 per unit. In light of this, how many units must be produced and sold to meet the target cost per unit?

c. Suppose the company decides that only 1,400 units can be sold at a price of $5,000 and, therefore, the target cost cannot be reached. The company is considering. dropping the steam feature, which adds $600 of variable cost per unit. With this feature dropped, the companybelieves it can sell 2,500 units at $4,000 per unit. Will
Baker be able to produce the item at the new taret cost of less.

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Solution Summary

Your tutorial is in Excel and shows two analyses to figure the target cost and then see if the target cost is met. Click in cells to see computations. Target cost is not met.