I-Covers Company manufactures designer cases for cell phones. Each cover sells for $20.00. The cost currently assigned to each decal is $12.00. A competitor is introducing a new designer line of cases that will sell for $16.00 each. Management of i-Covers believes it must lower its selling price to $16.00 in order to compete in this highly cost-conscious market. Marketing believes that the new selling price will allow i-Covers to maintain the current sales level in units. i-Covers Company’s sales are currently 300,000 designer cases per year.
a. What is the target cost for the new selling price if target profit is 40 percent of the new selling price?
b. What is the target selling price if costs cannot be reduced and target profit is changed to 25 percent of the new selling price?
c. What is the change in operating income for the year if $15.00 is the new selling price
and costs remain the same but sales increase to 500,000 units?
d. What is the target cost per unit if the selling price is reduced to $16.00 and the company wants to maintain its same total net income as when the selling price was $20.00? Assume that sales will increase to 500,000 decals.
e. Describe value engineering and its role in target costing.
