MC Question 29
The following scenario relates to questions 26–30.
Helot Co develops and sells computer games. It is well known for launching innovative and interactive role-playing games and its new releases are always eagerly anticipated by the gaming community. Customers value the technical excellence of the games and the durability of the product and packaging.
Helot Co has previously used a traditional absorption costing system and full cost plus pricing to cost and price its products.
It has recently recruited a new finance director who believes the company would benefit from using target costing. He is keen to try this method on a new game concept called Spartan, which has been recently approved.
After discussion with the board, the finance director undertook some market research to find out customers’ opinions on the new game concept and to assess potential new games offered by competitors. The results were used to establish a target selling price of $45 for Spartan and an estimated total sales volume of 350,000 units. Helot Co wants to achieve a target profit margin of 35%.
The finance director has also begun collecting cost data for the new game and has projected the following:
| Production costs per unit | $ |
|---|---|
| Direct material | 3·00 |
| Direct labour | 2·50 |
| Direct machining | 5·05 |
| Set-up | 0·45 |
| Inspection and testing | 4·30 |
| Total non-production costs | $’000 |
| Design (salaries and technology) | 2,500 |
| Marketing consultants | 1,700 |
| Distribution | 1,400 |
29. The direct labour cost per unit has been based on an expected learning rate of 90% but now the finance director has realised that a 95% learning rate should be applied.
Which of the following statements is true?
A The target cost will decrease and the cost gap will increase
B The target cost will increase and the cost gap will decrease
C The target cost will remain the same and the cost gap will increase
D The target cost will remain the same and the cost gap will decrease