Case 2: Modern Offlce Machines. Modern Office Machines is a manufacturer of small office equipment. Its product line includes electric pencil...

Case 2: Modern Offlce Machines.Modern Office Machines is a manufacturer of small office equipment. Its product lineincludes electric pencil sharpeners,d isk holders. tape dispensers,h ole punchers,c omputerstands,a nd a range of desktop accessoriesT. he electric pencil sharpeneri s one of its bestknown products. Until recently, the company had a dominant share of the pencil sharpenermarket, as much as a 30 percent share of total sales in the U.S.Because of recent competition from Far East manufacturers, who sold their pencilsharpeners for lower prices whiie offering comparative quality, Modern has lost sales andmarket share. This year only 10 percent of pencil sharpener sales were of Modern's brand.Initially, Modern had responded to competition by lowering prices and squeezing margins.Since this approach hasn't proven satisfactory the company has decided to try a differentapproach of designing products to a tight cost target.TC-36Modern established a team that included representatives from engineering, accounting,and production. The team was responsible for redesigning Modern's pencil sharpenerand improving its production process to achieve a25 percent reduction in costs over thenext two years. Since the current manufacturing cost is $16, this means a cost reduction of$4 for manufacturing.The team members reviewed the design and production of the pencil sharpener at oneof its meetings. They found that the sharpener is made from stainless steel casing. Theshell is divided into two parts: a base and a top. The motor, blades, and bin drawer areattached to the base using 12 screws and washers. The top is then attached to the base usinganother four screws. All parts are assembled by hand. The motor and bin drawer are purchasedfrom an outside supplier. The blades are manufactured by a blade machine. At standard,the assembly takes 30 minutes per pencil sharpener.The team also met with the marketing group and reviewed that group's research oncustomers'expectations about features and price. Their research indicates that there arethree features a customer desires in an elecffic pencil sharpener: speed of sharpening, easeofcleaning scrapings,a nd appearanceU. sing a five point scale,w ith five representingh ighimportance, the marketing group found that customers rated speed of sharpening a four,ease of cleaning scrapings a four, and appearance a two.Modern's engineers familiar with pencil sharpeners' functioning felt that four componentscould address these features: motor, blade assembly, drawer, and outer casing. Motorand blade assembly contribute 75 percent and25 percent respectively to the speed of sharpening.The design of the drawer is 100 percent responsible for ease of cleaning scrapings,while the appearancei s 100 percent determined by the casing. They proposed a solutionwhich would use a cheaper, less powerful motor (saving $3.00/motor) and a less expensiveplastic bin drawer (saving $1.00/drawer) to meet the 25 percent cost reduction target.The accountant on the cost planning team collected information about the currentactual cost of producing each of the components and other costs. Her cost data is summarizedin Table 1 below.Table 1. . . , ' .Currently Modern's pencil sharpener sells for $27.00. This yields a return on salesof 7 .4 percent. In general, the small office machinery industry gets a 15 percent return onsales. To respond to competitive pressure in past years, Modern had dropped its pricefrom $29.40 to $27. Modern would like to capture its lost market share and go back toits 15 percent return on sales. However, analysis of competitors' prices and marketresponset o thosep ricesi ndicatest hat a price of $23.50w ould stimulates alesa nd restoremarket position.TC-37Required:a. Evaluate the cost planning efforts of Modern in light of what you have studied abouttarget costing. Is their approach consistent with target costing?b. How would you change their process to be consistent with talget costing?c. Compute a talget cost for the pencil sharpenerA. ssume that a 15 percent feturn onsales is required.d. Compute a value index for the pencil sha4rener's various components.e. Which components should be targeted for cost reduction? Should any components betargeted for increased sPending?f. What target cost would you establish for each of the components?g. In the light of your analysis, what suggestions would you provide for the redesign ofthe pencil sharPener?