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Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of$230, as follows:
It is estimated that the competitive selling price for color laser printers of this type will drop to $400 next year. Instant Image has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:
- Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 15 minutes per unit.
- Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by$20 per unit.
- Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Forty percent of the direct labor and 48% of the factory overhead are related to running injection molding machines.
The direct labor rate is $30 per hour.
A. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price are maintained.
Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of$0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be$61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 13%. However, Munch N’ Crunch has funds to invest in only one of the projects.
b. Provide a memo to the management, with a recommendation.