Target Costing

| June 11, 2016

Question
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 subprocesses. 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. Use the Target Cost Worksheet to complete this assignment.

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