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1. CALCULATON OF OPERATING INCOME:

    Sales            (200 tables x $2,000)                                         400,000

    Less: Expenses:

             Direct Materials                             120,000

             Direct Manufacturing labour           142,000

             Design cost                                          5,000

             Variable Manufacturing Overhead     64,000

             Fixed Manufacturing overhead          46,500

             Marketing                                           15,000                        392,500

             Income                                                                                      7,500

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             Target income is 10% of revenue ie. 10% of 400,000 = 40,000, Hence, cost estimate developed by Hoover not
  met Paci c requiements,Textbook So value engineering
Solutions is needed. Expert Q&A Practice
2. Revenue          (200 tables x $ 1,950 new sales price)                        390,000
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    Less: Expenses

             Direct materials ( 120,000 - 40%)      72,000
             Direct Manufacturing labour             142,000
             Design cost (5,000 + 6,000)               11,000
             Variable Manufacturing Overhead      64,000
             Fixed Manufacruring Overhead          46,500
             Marketing                                            15,000                                 350,500
             Income                                                                                            39,500
In this new design of Li, target cost is reached, as targeted income is just $ 500 more than targeted income of 39,000
i.e 10% of revenue.
Due to change in design of table, Direct materials are reduced by 40%, so cost of material is locked in cost
3. New Revenues              ( 200 x 2,200)                                             440,000
     Less: Expenses
              Direct materials                                         120,000
              Direct Manufacturing labour                      142,000
              Design cost                                                    5,000
              Variable manufacturing Overhead               54,000
              Fixed manufacturing overhead                    46,500
              Marketing (15,000+7,000)                           22,000                     389,500
.             Income                                                                                          50,500

              No, target cost cannot be achieved without any value engineering:

4. Operating income in option 2                          $39,500

    Operating income in opiton 3                            50,500

            

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