“Timberland is considering manufacturing special crates to be used for shipping new
mainframe computers. The company is working with a computer manufacturer who is
thinking of using the new crates as a standard component for shipping their computers.
Timberland’s marketing manager has determined that mainframe computer buyers would be
willing to pay $110 for a crate. The cost to the computer maker of packaging the mainframe
in the new crates is $25. In addition, the computer manufacturer requires a 10 percent return
on its cost. The highest net selling price that Timberland can charge the computer maker is
$74.
Research conducted jointly by the computer maker and Timberland’s marketing
personnel shows that customers want six features. These are: (1) durability, (2) ease of
packing, (3) protection from damage (4) ease of use (5) compatibility with most brands of
mainframes, and (6) ability to reuse the crates.
Based on this research, Timberland’s engineers have come up with a design that
uses four main production modules or processes. Each process has several major sub‐
processes. A list of the major processes, together with preliminary cost estimates
(includes all labor, material and overhead) for manufacturing or buying each process,
appears in Table 1 below.
In addition to the above, the marketing department estimates that order filling
(primarily order processing and delivery) costs would run $4.00 per unit. General and
administrative costs are expected to be $14.00 a unit. Timberland expects to earn a 15
percent return on the highest net selling price.
Table One
Process Estimated Current Costs
A $9.50
B $8.50
C $8.00
D $46.00
Total Costs $72.00
Requirement:
Prepare a schedule showing the target cost and the current cost.
NOTE: Target cost equals selling price – required return of computer company –
required return to Timberland”
| Name | ||||||||||
| Timberland | Timberland | Timberland | CPU Company | CPU Company | CPU Company | Total | Total | Total | ||
| Cost Element | Target Cost | Current Cost | Difference | Target Cost | Current Cost | Difference | Target Cost | Current Cost | Difference | |
| Manufacturing | 72 | 72 | ||||||||
| Ordering | 4 | 4 | ||||||||
| Gen and Admin | 14 | 14 | ||||||||
| Installation | 25 | 25 | ||||||||
| Totals | 90 | 25 | ** | 115 | ||||||
| Process | Timberland | Timberland | Timberland | Proportion of | ||||||
| Current Cost | Target Cost | Difference | Total cost % | |||||||
| A | 9.5 | |||||||||
| B | 8.5 | |||||||||
| C | 8 | |||||||||
| D | 46 | |||||||||
| Totals | 72 | |||||||||
| Target Cost | Selling price – (required return to computer company)-(required return to Timberland) | |||||||||
| required return to computer company is 10% of its cost from Timberland | ||||||||||
| required return to Timberland is 15% of its highest net selling price | ||||||||||
| **must equal target cost | ||||||||||
| Target Cost to Current Cost Ratio Must be Calculated and used to compute target cost | ||||||||||