Reference no: EM132467798
Problem - Venus plc (Venus) manufactures fibre optic cables. This is an increasingly competitive market and the Chief Financial Officer (CFO) of Venus has suggested that the company's pricing policy should change. Specifically, he has suggested that Venus' quotation for a new contract should be based on target costing. The costs relevant to this are listed below and the prices in this market are all quoted on a per metre basis:
Target price $196 per metre of cable.
The contract is estimated at 25,000 metres of cable.
Venus profit margin 18%.
Material cost $50 per metre.
Production of each metre takes 0.5 hours of labour at a cost of $30 per hour.
Each metre of cable will use 1.2 units of machine time at a cost of $43 per hour.
Delivery and installation will cost $12 per metre of cable.
Total design costs for all 25,000 metres of cable are expected to be $900,000.
The rate of failed metres of cable is expected to amount to 3%. These metres will be reworked at an average cost of $35 per metre.
Required -
a) Calculate the target cost for the new contract and the cost gap.
b) Comment on actions that Venus might take to reduce the cost gap.
c) Explain how undertaking a Total Quality Management (TQM) approach may help Venus in its adoption of target costing.