Target Costing Oregon Equipment Company wants to develop a new log-splitting machine for rural homeowners. Market research has determined that the company could sell 5,000 log-splitting machines per year at a retail price of $600 each. An independent catalog company would handle sales for an annual fee of $3,000 plus $50 per unit sold. The cost of the raw materials required to produce the log-splitting machines amounts to $60 per unit. If company management desires a return equal to 10 percent of the final selling price, what is the target conversion and administrative cost per unit? Round answer to the nearest cent

Oregon Equipment Company

Target Costing:

Conversion and Admin cost per unit = $2,147,000/5,000 = $429.40

Explanation:

a) Data and Calculations:

Sales Revenue    $3,000,000 (5,000 x $600)

Cost of materials $300,000 (5,000 x $60)

Sales Commission $253,000 ($3,000 + (5,000 x $50)

Conversion & Admin cost $2,147,000

Target Profit  $300,000

b)The Conversion and Admin. cost of $2,147,000:

= Sales Revenue minus cost of materials minus sales commission minus target profit.

c) The target cost is the cost that is required to make a target profit.  This can be reversed with a target profit being worked out first before the target cost is achieved.  The target cost then will be the difference between the sales minus the target profit, all other things being equal.

in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation: