Step 1: Calculate Revenue Target
To calculate the revenue target, we need to multiply the anticipated sales volume by the unit selling price: \(Revenue = \, 400{,}000\, \text{units} \times \$45\, \text{per unit} = \$18{,}000{,}000\)
Step 2: Calculate Operating Income Target
To determine the target operating income, we should multiply the revenue target by the desired operating income percentage: \(Operating\, Income = \$18{,} 000{,} 000 \times 30\% = \$5{,} 400{,} 000\)
Step 3: Calculate Target Total Cost
Subtract the target operating income from the revenue target to find the target total cost: \(Target\, Total\, Cost = \$18{,} 000{,} 000 - \$5{,} 400{,} 000 = \$12{,} 600{,} 000\)
Step 4: Determine If Cost Estimate Meets Requirements
Let's compare the estimated costs with the target total cost. If the estimated costs are less than the target total cost, the company's requirements are met, and value engineering might not be needed.
##Part 2: Impact of Eliminating Special Ingredient and Design Changes on Target Cost##
Step 5: Calculate New Direct Materials Cost
To calculate the new direct materials cost, we should multiply the current direct material cost by 75% (100% - 25%): \(New\, Direct\, Materials\, Cost = \$100 × 75\% = \$75\)
Step 6: Calculate Additional Cost for Design Changes
The additional cost for the design changes is given as \(\$300{,}000\).
Step 7: Determine If New Design Meets Target Cost
Calculate the total cost after implementing the new design and compare it with the target total cost. We should consider the reduced direct materials cost, increased design change cost, and all other costs. If the new total cost is less than the target total cost, the design change allows the product to meet the target cost.
##Part 3: Impact of Reducing Fixed and Variable Costs on Target Cost##
Step 8: Calculate Reduced Costs
To calculate the reduced costs, we need to subtract the fixed cost reduction (\(\$250,000\)) and the variable cost reduction (\(\$1\) per unit × 400,000 units) from the original costs.
Step 9: Determine If Reduced Costs Result in Meeting Target Cost
We should now compare the new total cost after implementing cost reductions with the target total cost. If the reduced cost is less than the target total cost, Westerly will achieve its target cost.
##Part 4: Recommendation##
Step 10: Compare Solutions from Part 2 and 3
Compare the solutions from Part 2 (eliminating special ingredient) and Part 3 (reducing fixed and variable costs) to see which one is better in terms of meeting the target cost while maintaining the company's reputation and brand image.
Step 11: Provide a Recommendation
Based on the comparison made in Step 10, recommend either the solution proposed in requirement 2 or the one in requirement 3 as the best alternative for the company to meet its target cost while also ensuring the product's quality and the company's reputation.
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