“Pacific Décor, Inc., designs, manufactures, and sells contemporary wood furniture” (Horngren, Datar & Rajan, 2012, p. 465). One of their designers, Ling Li, has been working on a dining room table design and the product development manager, Jose Alvarez, likes the new design. However, Alvarez wants to make sure the dining room table is priced right. Analysis
The company wants to sell the tables at $2,000 each with the operating income being 10% of revenue. With the current table design as is, it will cost the company $392,500 to produce 200 tables. To calculate the cost per unit one would take the total cost $392,500 and divide it by the 200 tables, which equals $1,962.50 per table. However, the target cost per unit is $1,800 meaning that the actually cost per unit is higher than the company was expecting. Therefore, value engineering is needed to help reduce costs, but still have good quality. Since the current costs and table design did not meet the expectations of the company, Alvarez has suggested reducing the table width by 2 inches to fit with the standard size the Pacific Décor, Inc. uses. The reduction size of the table will save the company 40% on direct materials, but will cost them an additional $6,000 in design costs (Horngren, et al., 2012). Therefore, the new cost per unit is $1,752.50 while the target price is $1,755 which means the new designs fits with their 10% revenue. However, Li feels the two inches are important for the table design and if there were better marketing then the table could sell for $2,200 (Horngren, et al., 2012). For better marketing, Pacific Décor, Inc. will have to spend an additional $7,000 to sell the tables at the higher price. The new cost per unit would be $1,997.50 while the target price per unit would be $1,980. The better marketing scenario also fits in with the 10% revenue. Conclusion
Both the new table design and better marketing provide a better scenario for Pacific Décor, Inc. than the...
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