Milagro Corporation is developing a new espresso machine that only works with its specially developed strain of coffee bean. Milagro conducts market research and concludes that the product cannot sell for more than $200. At the company’s required gross margin of 40%, this means that the target cost of the product is $120. Management sets a maximum design duration of six months, with milestone reviews at one month intervals. The results of the month end milestone reviews are:
|
Review Date |
Cost Goal |
Actual Cost Estimate |
Actual Cost Variance from Goal |
Allowance Variance From Cost Goal |
|
Jan. 31 |
$120 |
$150 |
25% |
30% |
|
Feb. 28 |
120 |
143 |
19% |
20% |
|
Mar. 31 |
120 |
138 |
15% |
15% |
|
Apr. 30 |
120 |
134 |
12% |
10% |
|
May 31 |
120 |
Cancelled |
5% |
|
|
June 30 |
120 |
Cancelled |
0% |
As the table reveals, the Milagro project team was able to stay ahead of the cost target at the end of the first two months, but then was barely able to meet the allowable variance in the third month, and finally fell behind in the fourth month. Manage ment then cancelled the project, saving itself the cost of continuing the project team for several more months when it was becoming obvious that the team would not be able to achieve the target cost.