TARGET COSTING
Green Hills makes coffee pods for one-cup coffee machines. It was recently approached by Tracy’s Coffees, a high-end coffee shop, to see if it can make pods for its special blends of coffees. Current pod prices are $13.99 for a box of 24. Normal pods yield a 50% profit margin (shared by the manufacturer and retailer). For a normal box of 24 pods, $2.50 is the cost of the coffee (one-third of a pound); $0.50, the cost of the pod and top sealer; $0.50 for the box; and $3.49 for the manufacturer’s machining and overhead costs. These costs are for 24 pods. Tracy’s coffees sell for $12 per pound.
REQUIRED:
a. If Green Hills wants to make a 50% profit on the coffee pods, what is its target cost for Tracy’s coffee pods?
b. Given existing estimates, what is Green Hill’s current cost gap if it decides to make Tracy’s coffee pods?
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