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:
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.
$$\begin{array} { l l } \text { Direct materials costs (per car) } & \$ 10,000 \\\text { Direct labour costs (per car) } & \$ 3,000 \\\text { Overhead costs (per car) } & \$ 4,000\end{array}$$ 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.