Value engineering, target pricing, and target costs. Westerly Cosmetics manufactures and sells a variety of makeup and beauty products. The company has developed its own patented formula for a new anti-aging cream The company president wants to make sure the product is priced competitively because its purchase will also likely increase sales of other products. The company anticipates that it will sell 400,000 units of the product in the first year with the following estimated costs: Product design and licensing Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Fixed marketing $1,700,000 4,000,000 1,600,000 400,000 2,500,000 3,000,000

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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The company believes that it can successfully sell the product for $45 a bottle. The company’s target operating income is 30% of revenue. Calculate the target full cost of producing the 400,000 units. Does the cost estimate meet the company’s requirements? Is value engineering needed?

Value engineering, target pricing, and target costs. Westerly Cosmetics manufactures and sells
a variety of makeup and beauty products. The company has developed its own patented formula for a new
anti-aging cream The company president wants to make sure the product is priced competitively because
its purchase will also likely increase sales of other products. The company anticipates that it will sell
400,000 units of the product in the first year with the following estimated costs:
Product design and licensing
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Fixed marketing
$1,700,000
4,000,000
1,600,000
400,000
2,500,000
3,000,000
Transcribed Image Text:Value engineering, target pricing, and target costs. Westerly Cosmetics manufactures and sells a variety of makeup and beauty products. The company has developed its own patented formula for a new anti-aging cream The company president wants to make sure the product is priced competitively because its purchase will also likely increase sales of other products. The company anticipates that it will sell 400,000 units of the product in the first year with the following estimated costs: Product design and licensing Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Fixed marketing $1,700,000 4,000,000 1,600,000 400,000 2,500,000 3,000,000
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A componenet of the direct materials cost requires the nectar of a specific plant in South America. If the company could eliminate this special ingredient, the materials cost would decrease by 25%. However, this would require design changes of 300000 to engineer a chemical equivalent of the ingredient. Will this design change allow the product to meet its target cost?

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