Pls let me have your feedback on the attached question.TxsValerie1
Explain the statement that target costing is a cost management tool?
The Smiths Falls Times assembles sports watches. The watches consist of three
main components, Quartz mechanism, the case and the strap. SFC sources
components from outside and assembles the watches in its factory.
Extensive customer survey have established that there are three main functions
for the watches in the niche that SFT has chosen; time, water resistance and style.
Time is provided by the quartz mechanism; water resistance and style are
provided by the case ad the strap. Replaceable batteries power all the watches.
However, once the case is opened to replace the waterproof nature of the watch is
Market surveys have established three price points for the three new watches that
SFT now has in its design stage: (1) $30 for a basic watch (2) $50 for a basic
chronograph and (3) $120 for a multifunctional watch.
SFT ha determined, given its facility-sustaining costs and its cost of capital, that
three watches must provide a margin of $4, $8 and $15 to be acceptable.
Based on initial specification the supplier of quartz mechanisms has quoted price
$8, $15 and $40 for the three watches. Because these mechanisms use standard
components and well-known technology, planners at SFT consider these costs to
be as low as they can be. The implication is that any needed target cost reduction
will not be wrung out of the quartz mechanism.
There are many sources for the wrap straps, and the prices vary widely based
functionality, which include appearance, composition and wear. Suppliers’ quoted
price ranges for the three watches are as follows: $2-$7, $6-$9 and $20-$30. For
any given level of functionality chosen there is little price variation among
suppliers because the watchstraps are commodity products produced cost
The case provides two critical functions – style and water resistance. All cases
have to be guaranteed to a depth of 50m minimums and customer focus group
show that they find a guaranteed depth of 100 meters more desirable. Depending
upon style and degree of water resistance the supplier quoted the following price
ranges for the
watchcases: $5 -$15, $10 - $25 and $20 - $35. Both style and water resistance
increased in the product price.
Conversations with factory personnel indicated that the estimated costs of
assembling, packaging, and shipping each watch were about $5, $7 and $15.
For an investment estimated at about $5,000,000 SFT could provide management
advice to one of its suppliers. This advice would be related to developing better
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