Target pricing, target cost, and value engineering. Avery, Inc., manufactures component parts. One product, TX40, has annual sales of 50,000 units. Avery sells TX40 for $40.60 per unit. Avery has two direct-cost categories (direct materials, direct manufacturing labor) and two activity-based indirect-cost categories (engineering and testing). All R&D and design costs are included in the engineering cost category. There are no marketing, distribution or customer-service costs. The cost driver for engineering is engineer-hours, and the cost driver for testing is test-hours. Testing costs are variable costs. Engineering costs are fixed costs based on engineering capacity. Information on annual costs includes the following
Direct materials: $14.98 per unit
Direct manufacturing labor: $15 per direct manufacturing labor-hour
Engineering: $14 per engineer-hour (based on capacity of 25,000 engineering-hours)
Testing: $12 per test-hour
Each unit of TX40 requires 0.5 direct manufacturing labor-hour to produce and 0.25 test-hour to test.
1.Calculate the full cost per unit of TX40 at the production level of 50,000 units.
2.What is the markup percentage on the full cost per unit of TX40?
3. The sales manager thinks that Avery can sell 10,000 more units at the $40.60 price if Avery spends $200,000 on marketing by putting advertisements in trade magazines. Avery will not need to do any additional engineering for these units. Is this a good idea?
4. If Avery spends an extra $200,000 on marketing but uses the same markup percentage on the full cost per unit as in requirement 2, calculate the new selling price.