Target costs, effect of product-design changes on product costs. Neuro Instruments uses a manufacturing costing system with one direct-cost category (direct materials) and three indirect-cost categories:
a. Setup, production-order, and materials-handling costs that vary with the number of batches
b. Manufacturing-operations costs that vary with machine-hours
c. Costs of engineering changes that vary with the number of engineering changes made
In response to competitive pressures at the end of 2016, Neuro Instruments used value-engineering techniques to reduce manufacturing costs. Actual information for 2016 and 2017 is as follows:
The management of Neuro Instruments wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit of one of its products, HJ6, by 5%.
Actual results for 2016 and 2017 for HJ6 are:
1. Calculate the manufacturing cost per unit of HJ6 in 2016.
2. Calculate the manufacturing cost per unit of HJ6 in 2017.
3. Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2017? Explain.
4. Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2017.
5. What challenges might managers at Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges?
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