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Jaybird Company operates in a highly competitive market where the market price for its product is $135 per unit. Jaybird desires a 30% profit per unit. Jaybird expects to sell 5,000 units. Additional information is as follows: Variable Costs per Unit   Fixed Costs (total)  Direct materials $ 22 Overhead $ 45,000Direct labor 23 General and administrative 18,000Overhead 21    General and administrative 27    To achieve the target cost per unit, Jaybird must reduce total expenses by how much?

Question

Jaybird Company operates in a highly competitive market where the market price for its product is 135perunit.Jaybirddesiresa30135 per unit. Jaybird desires a 30% profit per unit. Jaybird expects to sell 5,000 units. Additional information is as follows: Variable Costs per Unit   Fixed Costs (total)  Direct materials 22 Overhead $ 45,000Direct labor 23 General and administrative 18,000Overhead 21    General and administrative 27    To achieve the target cost per unit, Jaybird must reduce total expenses by how much?

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Solution

To answer this question, we first need to calculate the target cost per unit, the current cost per unit, and then find the difference.

  1. Calculate the target cost per unit: The market price for the product is 135andJaybirddesiresa30Desiredprofitperunit=30/100135 and Jaybird desires a 30% profit per unit. So, the target cost per unit would be the market price minus the desired profit. Desired profit per unit = 30/100 * 135 = 40.5Therefore,targetcostperunit=40.5 Therefore, target cost per unit = 135 - 40.5=40.5 = 94.5

  2. Calculate the current cost per unit: The current cost per unit is the sum of all variable costs per unit. Variable costs per unit = Direct materials + Direct labor + Overhead + General and administrative = 22+22 + 23 + 21+21 + 27 = $93

  3. Calculate the total current cost: Total current cost = (Current cost per unit * number of units) + Fixed costs Total current cost = (935000)+93 * 5000) + 45,000 + 18,000=18,000 = 485,000

  4. Calculate the total target cost: Total target cost = Target cost per unit * number of units Total target cost = 94.55000=94.5 * 5000 = 472,500

  5. Find the difference between the total current cost and the total target cost to find out by how much Jaybird must reduce total expenses. Reduction in total expenses = Total current cost - Total target cost Reduction in total expenses = 485,000485,000 - 472,500 = $12,500

So, to achieve the target cost per unit, Jaybird must reduce total expenses by $12,500.

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