Reference no: EM131812990
SXL is a specialist car manufacturer that produces various models of car. The organisation is due to celebrate its 100th anniversary next year. To mark the occasion, SXL intends to produce a sports car; the Model S. As this will be a special edition, production will be limited to 1,000 Model S cars. SXL is considering using a target costing approach and has conducted market research to determine the features that consumers require in a sports car. Based on this market research and knowledge of competitors' products, SXL has decided to price the Model S at $19,950. SXL requires an operating profit margin of 25% of the selling price of the car. Details for the forthcoming year are as follows: Forecast direct costs for a Model S car Labour $5,000 Material $9,500 Forecast annual overhead costs $ Cost driver Production line cost 4,630,000 See note 1 Transportation costs 1,800,000 See note 2 Note 1 The production line that would be used for Model S has a capacity of 60,000 machine hours per year. The production line time required for Model S is 6 machine hours per car. This production line will also be used to make other cars and will be working at full capacity. Note 2 Some models of cars are delivered to showrooms using car transporters. 60% of the transportation costs are related to the number of deliveries made. 40% of the transportation costs are related to the distance travelled.
The car transporters are forecast to make a total of 640 deliveries in the year and carry 10 cars each time. The car transporter will always carry its maximum capacity of 10 cars.
The total annual distance travelled by car transporters is expected to be 225,000km. 50,000km of this is for the delivery of Model S cars only. All 1,000 Model S cars that will be produced will be delivered in the year using the car transporters.
Required: (a) (i) Calculate the forecast total cost of producing and delivering a Model S car using activity based costing principles to assign the overhead costs.
(ii) Calculate the value of any cost gap that currently exists between the forecast total cost and the target total cost of a Model S car.
(b) Explain TWO potential advantages to SXL of using target costing for the Model S car