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ABC Ltd has an aggressive research and development programme and uses target...

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Accounting

ABC Ltd has an aggressive research and development programme and uses target costing to
aid in the final decision to release new products for production. A new product is being
evaluated. Market research has surveyed the potential market for this product and believes
that its unique features will generate a total demand of 50.000 units at an average price of
$4.600 per unit. The design and production engineering departments have performed a value
analysis on the product and have determined that the total cost for the various value chain
functions using the existing process technology are as follows:
Value chain function
Total cost over
product life ($)
Management's target profit is set at 20% of sales. Production engineering indicates that new
process technology can reduce the manufacturing cost by 40%, but it will cost $20,000,000.
Required:
Target costing and value engineering are commonly adopted by manufacturing firms in
new product development. Describe and explain the terms "target costing" and "value
engineering".
Analyse and explain whether the new product should be released to production under
the following two assumptions:
(i) existing process technology is used
(ii) new process technology is purchased.
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