Calculation Of Cost Reduction To Achieve Profit Margin


Terracotta Ltd – Newly introduced products under review

Coal Flyash – Coal flyash bricks are made from coal-burning waste. These bricks reduce raw material cost for Terracotta Ltd and reduce waste disposal costs for power plants. The bricks are designed to have better color, physical consistency, weight, compressive strength and thermal conductivity than standard bricks.

Colourbrix – Colourbrix has a range of new and vibrant colors. They do not need to be rendered or painted because the color is infused into the brick. Colourbrix pricing strategy:

Sales price per unit (1000 bricks)                    $5750
Expected variable costs per unit                      $3120
Fixed overhead costs to be allocated                $2700,000
Estimated unit sales in the first year                 4000 units
Desired profit margin                                      40 percent

In order for Terracotta Ltd to achieve the desired profit margin on sales for Colourbrix, what approximate reduction in unit cost will the design and manufacturing departments need to achieve through value engineering initiatives?

A. $187
B. $345
C. $6 75
D. $1248


This multiple choice question belongs to Corporate Strategy and it discusses about the reduction in unit cost in design and manufacturing to achieve through value engineering initiatives.

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