Belleville Electrical makes small electric motors for a variety of home appliances. Belleville sells the motors to appliance makers, who assemble and sell the appliances to retail outlets. Although Belleville makes dozens of different motors, it does not currently make one to be used in garage-door openers. The company’s market research department has discovered a market for such a motor.
The market research department has indicated that a motor for garage door openers would likely sell for $26. A similar motor currently being produced has the following manufacturing costs:
Direct materials $13.00
Direct labour……….6.00
Overhead……………8.00
Total………………..$27.00
Belleville desires a gross margin of 20 percent of the manufacturing cost.
1. Suppose Belleville used cost-plus pricing, setting the price 20 percent above the manufacturing cost. What price would be charged for the motor? Would you produce such a motor if you were a manager at Belleville? Explain.
2. Suppose Belleville uses target costing. What price would the company charge for the motor for a garage door opener? What is the highest acceptable manufacturing cost for which Belleville would be willing to produce the motor?
3. As a user of target costing, what steps would Belleville managers take to try to make the production of this product feasible?
