(Target Costing) Skiff Company manufactures sails for small sailboats. Its most popular model, the Aquatic, sells for $3,500. It has variable costs totalling $1,900 per sail and fixed costs of $800 per sail (based on current demand of 4 production runs of 2,000 sails per year). Set-up costs are $50,000 per production run (which are not included in the fixed or variable costs already given). Skiff”s current plant capacity is 12,000 sails.
Sky to Sea Inc., Skiff”s main competitor, is introducing a new sail similar to the Aquatic that will sell for $2,999. Skiff management feels it must lower the price of the Aquatic in order to compete. The company marketing department believes that the new price will increase demand for the Aquatic by 40% per year.
- What is the target cost per unit for the new price if the target profit is 25% of sales?
- Is this target cost achievable with the possible increase in demand?
- Outline areas of cost reduction that could be investigated by Skiff.