Scot Decor Manufactures Easy-To-Assemble Furniture for Home and Office The Bookcase Currently Costs $62 to Produce and Distribute, and Firm

Essay

Scot Decor manufactures easy-to-assemble furniture for home and office. The firm is considering modification of a bookcase, and the company's marketing department surveyed potential buyers regarding five proposed changes (A-E). The buyers' responses, in order of preference, along with Scot's related unit costs for the modifications, follow. $\begin{array}{ccl}\text { Order of } & \text { Change } & \text { Cost } \\\text { Preference } \\1 & \mathrm{A} & \$ 6.25 \\2 & \mathrm{D} & 4.00 \\3 & \mathrm{B} & 3.00 \\4 & \mathrm{C} & 2.50 \\5 & \mathrm{E} & 6.50\end{array}$ The bookcase currently costs $62 to produce and distribute, and Scot's selling price for this unit averages $115. An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that Scot is considering and other models having only a few. The current manufacturers' selling prices on these bookcases average $125.
Required:
A. Why is there a need in target costing to (a) focus on the customer and (b) have a marketing team become involved with product design?
B. Management desires to earn approximately the same rate of profit on sales that is being earned with the current design.
1. If Scot uses target costing and desires to meet the current competitive selling price, what is the maximum cost of the modified bookcase?
2. Which of the modifications should Scot consider?
3. Assume that Scot wanted to add a modification or two that you excluded in your answer to requirement "B2." What process might management adopt to allow the company to make its target profit for the bookcase? Briefly explain.