Production Choice Decisions

Konje Plc, a mobile phone manufacturer is facing increasing competition from manufacturers of high end smart phones from China. In response to the increased competition, they are considering production of two smart phone versions namely -Konje100 and the Konje 200. The Marketing department has provided the followingdetails for the two phones:

Phone Market price similar

 

Phones (K

Estimated production cost (K)

Konje100 7,000.00 4,000.00

Konje 200 8,000.00 6,500.00

 

In order for Konje Plc to achieve the return expected by its shareholders, a markup of 40% on sales of all phone sales is required.

Required:

(a) Calculate the target cost and target cost gap for each of the two phones and explain the significance of your computations.(10 Marks)

(b) Assuming the estimated production cost for the konje 200 was higher than its target cost, advise Konje plc on what actions they can take to reduce the target cost gap.(4 Marks)

(c) Based on the assumption in (b) above, explain how Kaizen costing can be useful in the production of the Konje 200 after your proposed actions have been implemented.(2 Marks)

(d) Explain the advantages of target costing compared to traditional costing approaches. (4 Marks)

 

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