Accounting: What the Numbers Mean 11th Edition by Wayne McManus,Daniel Viele,David Marshall

Exercise 7

Target costing EagleEye Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. EagleEye Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs to correctly assess its ability to compete. The market price for this binocular style is well established at $98 per unit. EagleEye has enough square footage in its plant to accommodate the new production line, although several pieces of new equipment would be required; their estimated cost is $3,750,000. Eagle- Eye requires a minimum ROI of 12% on any product line investment and estimates that if it enters this market with its digital binocular product at the prevailing market
price, it is confident of its ability to sell 15,000 units each year.
Required:
a. Describe, in general terms, any costs that EagleEye Company would consider relevant to the decision of entering the digital binocular market.
b. Calculate the target cost per unit for entry into the digital binocular market.