Target Costing Over Product Life Cycle
Southeast Equipment makes a variety of motor-driven products for homes and small businesses. The
market research department recently identified power lawn mowers as a potentially lucrative market.
As a first entry into this market, Southeast is considering a riding lawn mower that is smaller and less
expensive than those of most of the competition. Market research indicates that such a lawn mower
would sell for about $995 at retail and $800 wholesale. At that price, Southeast expects life-cycle sales
2004 ____ 1,000
2005 ____ 5,000
2006 ____ 10,000
2007 ____ 10,000
2008 ____ 8,000
2009 ____ 6,000
2010 ____ 4,000
The production department has estimated that the variable cost of production will be $475 per
lawn mower, and annual fixed costs will be $900,000 per year for each of the 7 years. Variable selling
costs will be $25 per lawn mower and fixed selling costs will be $50,000 per year. In addition, the
product development department estimates that $5 million of development costs will be necessary to
design the lawn mower and the production process for it.
2. Suppose Southeast expects pretax profits equal to 10% of sales on new products. Would the company
undertake production and selling of the riding lawn mower?
3. Southeast Equipment uses a target costing approach to new products. What steps would management
take to try to make a profitable product of the riding lawn mower?
1. Total expected profit over the life cycle = Total income over the life cycle - Total cost over the life cycle
Total income over the life cycle = Total unit sales X price per unit
Total unit sales = 44,000
Price per unit = $800 (wholesale since this is what is received by the company)
Total revenue = 44,000 X 800 = ...
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