Overland Company Is Considering Manufacturing a New Brand of Car

Essay

Overland Company is considering manufacturing a new brand of car. Given the current product and process designs, the cost data are as follows: $$\begin{array} { l l } \text { Direct materials costs (per car) } & \$ 10,000 \\\text { Direct labour costs (per car) } & \$ 3,000 \\\text { Overhead costs (per car) } & \$ 4,000\end{array}$$ The company expects the selling price to be $20,000 and has set a target profit of $5,000.
A supplier told Overland that it could purchase a couple of similar components under a different brand name at a lower price. This would result in cost savings of $2,000 per car. Furthermore, the company found that it could redesign its manufacturing process to cut down on both inspection labour and worker labour, which would result in cost savings of $1,000 per car.
Required:
A. Calculate Overland's target cost.
B. Calculate the total costs per car after Overland redesigns its processes and schedules to buy cost-saving components.
C. Should Overland manufacture the car? Calculate the expected profit after the cost savings are taken into account.