Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of $230, as follows:

Instant Image Inc. manufactures color laser printers. Model J20 presently sells for $460 and has a product cost of $230, as follows:

Direct materials $175

Direct labor       40

Factory overhead   15

Total            $230

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:

1. 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.

2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $20 per unit.

3. 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 is maintained.

b. Determine the required cost reduction.

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved.

Answer:

a. Historical markup percentage on product cost: $

460 – $230 

$230 

or, 

$230 

$460 

=  50% of selling price 

$400 revised selling price × 50% = $200 amount of markup on target product 

cost 

$400 selling price – $200 markup = $200 target product cost 

(Also, $200 × 100% = $200 markup on product cost; $200 + $200 = $400 selling 

price) 

b. Required cost reduction:  $230 – $200 = $30 

c. 1. 

2. 

Direct labor reduction: 

Additional inspection: 

$30 

60 min. 

$30 

60 min. 

× 15 min. = 

× 6 min. = 

$(3.00) 

Direct material reduction:   20.00 17.00 

3. Injection molding productivity improvement: 

Direct labor improvement (25%* × 40% × $40) $4.00  

Factory overhead improvement (25%* × 48% × $15)   1.80     5.80 

Total savings per unit 

* Improving the cycle time from four minutes to three minutes is a 25% reduction. 

The total savings exceeds the required target cost reduction by $0.30. Thus, 

these improvements are sufficient to meet the target cost.