Calculate the expected cost per unit of the new product

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Question - Target costing - Enterprise Ltd are developing a new type of floor cleaner. Market research has indicated that customers would be willing to pay £130 for the product.

The company usually expect a profit margin of 30% on products. Fixed costs for enhancements to production machinery are expected to be £150,000 per year and Quality assurance £50,000.

The company is estimating an annual production volume of 50,000 and allocates overheads on the basis of number of units produced.

Materials are expected to cost £56.45 per unit. Each product requires 2 and a half hours of specialist labour to manufacture and the average cost of labour is £14.

Required -

a) Explain the benefits of adopting a target costing approach at an early stage in the development process.

b) Calculate the expected cost per unit of the new product and identify any cost gap that might exist.

c) Assuming a cost gap was identified in the process, outline possible steps that could be taken to reduce this gap.

Reference no: EM133006708

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