Test your understanding 7
LMN Ltd makes and sells two products, X and Y. Both products are manufactured through two consecutive processes – assembly and finishing. Raw material is input at the commencement of the assembly process. An ABC approach is used in the absorption of product specific conversion costs.
The following estimated information is available for the period ending 31 December 20x5:
Product XProduct Y
Production/sales (units)12,0007,200
Selling price per unit$75$90
Direct material cost per unit$20$20
ABC variable conversion cost per unit
- assembly$20$28
- finishing$12$24
Product-specific fixed costs$170,000$90,000
Company fixed costs$50,000
LMN Ltd uses a minimum contribution/sales (C/S) ratio target of 25% when assessing the viability of a product. In addition, management wish to achieve an overall net profit margin of 12% on sales in this period in order to meet return on capital targets.
Explain how target costing may be used in achieving the required returns and suggest specific areas of investigation.
