Problem:
Palms, Inc., sells one of its products for $80 each. Sales volume averages 2,000 units per year. Recently, its main competitor reduced the price of its product to $56. Palms expects its sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained.
Information about the product (for production of 2,000) is as follows:
|
|
SQ
|
AQ
|
Actual Cost
|
|
Materials (pounds)
|
9,800
|
10,000
|
$40,000
|
|
Labor (hours)
|
2,400
|
2,500
|
20,000
|
|
Setups (hours)
|
-0-
|
400
|
12,000
|
|
Material handling (moves)
|
-0-
|
700
|
4,000
|
|
Warranties (number repaired)
|
-0-
|
500
|
20,000
|
Required:
Q1. Calculate the target cost for maintaining current market share and profitability.
Q2. Calculate the nonvalue-added cost per unit.
Q3. If nonvalue-added costs can be reduced to zero, can the target cost be achieved?