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Target Costing in a Service Firm Alert Alarm Systems installs home security systems. Two of its systems, the ICU 100 and the ICU 900, have these characteristics:
Design Specifications
ICU 100
ICU 900
Cost Data
Video cameras
1
3
$150/ea.
Video monitors
$ 75/ea.
Motion detectors
5
8
$ 15/ea.
Floodlights
7
$ 8/ea.
Alarms
2
Wiring
700 ft.
1,100 ft.
$ 0.10/ft.
Installation
16 hrs.
26 hrs.
$ 20/hr.
The ICU 100 sells for $810 installed, and the ICU 900 sells for $1,520 installed.
Required:
1. What are the current profit margins on both systems?
2. Alert's management believes that it must drop the price on the ICU 100 to $750 and on the ICU 900 to $1,390 to remain competitive in the market. Recalculate profit margins for both products at these price levels.
3. Describe two ways that Alert could cut its costs to get the profit margins back to their original levels.
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