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: 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?

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:    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?

Quizplus · Accepted Answer

To achieve the 5% profit objective, Clark Manufacturing needs to have a total cost per unit of $17.10 ($18.00 x 0.95).

Total cost per unit = direct cost per unit + indirect cost per unit

Given that the market price is $18.00, the direct cost per unit is:

direct cost per unit = market price - profit per unit
direct cost per unit = $18.00 - ($18.00 x 0.05)
direct cost per unit = $17.10 x 0.95
direct cost per unit = $16.245

So, we can set up an equation to solve for the new indirect cost per unit:

$16.245 + new indirect cost per unit = $17.10

new indirect cost per unit = $17.10 - $16.245

new indirect cost per unit = $0.855

However, this is the amount of cost savings Clark needs to achieve. To find the new indirect cost per unit, we need to subtract the cost savings from the old indirect cost per unit:

new indirect cost per unit = $6.42 - $0.855

new indirect cost per unit = $5.565

The closest answer choice to this is B) $6.00, so that is the best choice.

Clark Manufacturing Makes Blank CDs; It Is a Very Competitive