Clark Manufacturing makes blank CDs; it is a very competitive market and the company follows a target pricing strategy. Currently the market price for a unit of product (one unit equals a package of 100 CDs) is $18.00. Clark's production costs are shown below:
Direct materials $5.00 per unit
Direct labor $2.90 per unit
Indirect production costs $6.42 per unit
Non-manufacturing costs $3.20 per unit
Clark uses activity-based costing for its indirect production costs and provides the following information about this particular product:
-
The company's objective is to earn 5% profit on the sales price of the product. Clark carried out a value engineering study and decided that they could make the processing activity more efficient and save costs. In order to achieve their profit objective for this product, they need to reduce the indirect cost per unit from $6.42 down to what amount?
A) $6.10
B) $6.00
C) $5.80
D) $5.62

Question

Clark Manufacturing makes blank CDs; it is a very competitive market and the company follows a target pricing strategy. Currently the market price for a unit of product (one unit equals a package of 100 CDs) is $18.00. Clark's production costs are shown below:
Direct materials $5.00 per unit
Direct labor $2.90 per unit
Indirect production costs $6.42 per unit
Non-manufacturing costs $3.20 per unit
Clark uses activity-based costing for its indirect production costs and provides the following information about this particular product: 
-
The company's objective is to earn 5% profit on the sales price of the product. Clark carried out a value engineering study and decided that they could make the processing activity more efficient and save costs. In order to achieve their profit objective for this product, they need to reduce the indirect cost per unit from $6.42 down to what amount?
A) $6.10 
B) $6.00 
C) $5.80 
D) $5.62

Quizplus · Accepted Answer

B) Calculations:
$18.00 - ($18.00 × 5%) = $17.10
$5.00 + $2.90 + $6.42 + $3.20 = $17.52
$17.10 - $17.52 = ($0.42)
$6.42 - $0.42 = $6.00

Clark Manufacturing Makes Blank CDs; It Is a Very Competitive