What does the target full product cost include?
Target full product cost includes the difference between the selling price and the desired profit.
In accounting, the term cost denotes the amount of money a business or individual spends to acquire something in return, such as goods or services. Costs are considered expenses and recorded in the books of accounts.
The target full product cost includes the expected selling price of the product and the desired profit.
In other terms, the target full product cost includes the estimation of the target cost by subtracting the company’s desired profit margin from the competitive market price.
StoreAll produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the products is so high that StoreAll can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 3,300 hours per period. StoreAll can produce 10 large bins every hour, whereas it can produce 17 regular bins in the same amount of time. Fixed costs amount to $115,000 per period. Sales prices and variable costs are as follows:
Sales price per unit $8.00 $10.40
Variable cost per unit 3.50 4.40
1. Which product should StoreAll emphasize? Why?
2. To maximize profits, how many of each size bin should StoreAll produce?
3. Given this product mix, what will the company’s operating income be?
This problem continues the Piedmont Computer Company situation from Chapter 24. Piedmont Computer Company’s payroll accountant has submitted her resignation and will be leaving the company in two weeks. The company must decide if it will hire a replacement or outsource the payroll position. The current employee earns a salary of $40,000. Medical insurance, employer payroll taxes, and contributions to the pension plan for this position cost $7,600. The company has already invested $22,000 in payroll software. Required annual updates to remain in compliance with all state and federal laws are $495. The company also spends $1,750 per year in professional development for this position to ensure the employee stays up-to-date with payroll changes. Piedmont Computer Company pays its employees weekly. Payroll Professionals will process the company’s weekly payroll for $1,000 per week. This fee also includes preparing all necessary payroll tax returns, reports, and W-2s.
1. Prepare a differential analysis to determine if Piedmont Computer Company should replace the employee or outsource the payroll function.
2. What other factors should Piedmont Computer Company consider in making this decision?
Elm Petroleum has spent $204,000 to refine 61,000 gallons of petroleum distillate, which can be sold for $6.30 per gallon. Alternatively, Elm can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.10 per gallon. To sell the cleaner fluid, Elm must pay a sales commission of $0.10 per gallon and a transportation charge of $0.16 per gallon.
1. Diagram Elm’s decision alternatives, using Exhibit 25-18 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Elm’s decision?
3. Should Elm sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
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