SPO Corporation has determined that its new fireplace heat shield would gain widespread customer acceptance if the company could price it at or under $110. Anticipated labor hours and costs for each unit of the new product are:
Direct materials cost $25
Direct labor cost
Manufacturing labor
Hours 1.2
Hourly labor rate $15
Assembly labor
Hours 1.5
Hourly labor rate $12
Machine hours 2
The company currently uses the following three activity-based cost rates:
Materials handling $1.30 per dollar of direct materials
Production $3.00 per machine hour
Product delivery $5.50 per unit.
The company’s minimum desired profit is 20 percent over total production and delivery costs.
Required:
a) Given the above costs and desired profit, compute the price for the new heat shield and determine if it should be marketed by the company.
b) If the price computed in part a) is not practical for the market, what would the target cost have to be to achieve the target price? Assume the company would be willing to accept a desired profit of 15% of sales.