Question 2

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 the

Konje100 and the Konje 200. The Marketing department has provided the following

details 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 gab.

(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)