Problem 18-47

Insert your answers in the gray-shaded cells or choose from drop-down

list. If an answer is incorrect, the word “wrong” will appear.

a.

Year of
Life Cycle

Units

Price

Revenue

Year 1

      1,00,000

$          2.50

Year 2

      2,50,000

$          2.40

Year 3

      3,50,000

$          2.30

Year 4

      5,00,000

$          2.10

Year 5

      6,00,000

$          2.00

Year 6

      4,50,000

$          2.00

Year 7

      2,00,000

$          1.90

Year 8

      1,30,000

$          1.90

Totals

Target cost calculation:

Total revenue

Desired Percent

Profit margin

25%

                  –

Target cost

Divided by total units

    25,80,000

Unit target cost

b.

Total production cost estimate:

Fixed costs:

  Fixed costs per year

$   2,00,000

  x Number of years

                  8

  Total fixed costs

Variable costs:

  Total variable cost per unit

  x Number of units

    25,80,000

  Total variable costs

Total estimated product costs

Discuss how management might use the comparison of target costs to estimated costs.

c.

Should Gourmet Grade begin

production of the new entrée?

No

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