Activity based management and target cost
Refer to Exercises 18 17 and 18 19. Controller Michael Bender is surprised by the increase in cost of the deluxe model under ABC. Market research shows that for the deluxe rim to provide a reasonable profit, Elton will have to meet a target manufacturing cost of $656 per rim. A value engineering study by Elton’s employees suggests that modifications to the finishing process could cut finishing cost from $50 to $40 per hour and reduce the finishing direct labor hours per deluxe rim from 6.5 hours to 6 hours. Direct materials would remain unchanged at $50 per rim, as would direct labor at $56 per rim. The materials handling, machine setup, and insertion of parts activity costs also would remain the same.
1. Would implementing the value engineering recommendation enable Elton to achieve its target cost for the deluxe rim?