ACCT320 Strategic Management Accounting

ACCT320 Strategic Management Accounting
Chapter 13 Target Costing

Hydraulic Solutions manufactures hydraulic components for large automated machine tools. Hydraulics' sales for its main valve are declining because of aggressive pricing by competitors. Hydraulics’ valve sells for $775 compared to the competitor’s price of $605 for the same valve. The marketing manager has determined that a decrease to a new price of $600 is necessary to regain market share and annual sales of 3,200 units. Hydraulic Solutions uses Activity Based Costing (ABC) to determine product costs and profitability. Current cost data based on sales of 3,200 valves follows:

Actual Cost Item
(cost driver) ABC Rate Actual Cost Driver Usage activity.

Direct materials
(square feet of sheet metal) 66.50 12,000 sq. ft

Direct labor 20.00 25,0000 labor hrs.
(labor hours)

Inspections
(# inspections) 50.00 2,600 inspections

Materials handling (#ofpurchases) 15.50 8,000 purchases

Set-ups (# of set-ups) 120.00 500 set-ups


Required – show all of your calculations to support your answers:
1. Using Activity Based Costing (ABC) calculate the current product cost per unit and profit per unit.
2. Calculate the current profit as a percentage of sales.
3. With the new sales price of $600 and the same current profit percentage, calculate the new target cost per unit.
4. Hydraulic Solution's engineering staff has made design changes to the hydraulic valve product. These changes are expected to result in a more efficient manufacturing process. The following are the new level of activities (cost driver usage) to manufacture the hydraulic valve after the design changes.


Actual Cost Item
(cost driver) ABC Rate Actual Cost Driver Usage Activity

Direct materials
(square feet of sheet metal) $66.50 9,000 sq. ft.

Direct labor (labor hours) 20.00 9,000 sq. ft.

Inspections 50.00 2,100
(# inspections)

Materials handling (# of purchases) 15.50 6,000

Set-ups 120.00 500
(# of set-ups)


5. Calculate the product cost per unit after the design changes are implemented. Did Hydraulic Solutions meet the target cost per unit at the new $600 price?
6. Given your analysis what strategy do you suggest for Hydraulic?

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