Business, 13.08.2020 17:01 xxaurorabluexx

Simon Corporation manufactures hydraulic valves. The product life of a valve is 4 years. Target average profit margin for Simon 20.00% The company does not expect the manufacturing cost to vary over the next 4 years. Estimated sales volume and the unit selling price of the valve for the next 4 years is given below: Year Sales volume (units) Unit selling price Year 1 40,000 $80.00 Year 2 50,000 $75.00 Year 3 35,000 $50.00 Year 4 25,000 $45.00 What is the allowable unit cost of a hydraulic valve using the target costing model

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Answer from: caitlin89

Allowable unit cost of a hydraulic valve using the target costing model = 52.4

Explanation:

Given that:

Simon Corporation manufactures hydraulic valves. The product life of a valve is 4 years.

Target average profit margin for Simon 20.00%

The company does not expect the manufacturing cost to vary over the next 4 years

Estimated sales volume and the unit selling price of the valve for the next 4 years is given below:

Year Sales volume (units) Unit selling price

Year 1 40,000 $80.00

Year 2 50,000 $75.00

Year 3 35,000 $50.00

Year 4 25,000 $45.00

The objective is to determine the allowable unit cost of a hydraulic valve using the target costing model.

The Cost for each unit selling price can be calculated as:

= unit selling price - (Target average profit margin × unit selling price)

For Year 1

= $80.00- (0.2 × $80.00)

= $80.00 - $16.00

= $64.00

For Year 2

= $75.00 - ( 0.2 × $75.00)

= $75.00 - ( $15.00)

= $60.00

Year 3

= $50.00 - (0.2× $50.00)

= $50.00 - $10.00

= $40.00

Year 4

= $45.00 - (0.2 × $45.00)

=$45.00 - $9.00

= $36.00

Year Sales volume Unit Cost Cost per Unit

(units) selling price

Year 1 40,000 $80.00 $64.00 $2560000

Year 2 50,000 $75.00 $60.00 $3000000

Year 3 35,000 $50.00 $40.00 $1400000

Year 4 25,000 $45.00 $36.00 $900000

Total: 150000 $7860000

Allowable unit cost = Total cost/Total number of unit cost

Allowable unit cost = $7860000/150000

Allowable unit cost = 52.4

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