PROBLEM #4 Variable Cost

PROBLEM #4
Dover Company manufactures cell phones and plans to develop a new model with a feature
(aptly named Don’t Drink and Dial) that prevents the phone from dialing an owner-defined list of
phone numbers between the hours of midnight and 6:00 AM. The new phone model has a target
price of $380. Management requires a 25% profit on new product revenues. The overall research
and development costs are expected to total $3,000,000. Annual sales volume is expected to
average 120,000 phones over an expected life cycle of 5 years. Annual fixed overhead plus fixed
selling and administrative costs are expected to total $500,000.
A. Calculate the target variable cost per unit.
B. Based on your answer in part A and assuming that expected variable costs per unit are as
follows:
Direct materials
$175
Direct labor
20
Variable Overhead
75
Variable Selling
3% commission on sales
Would Dover Company agree to develop, manufacture, and sell this product? Support your
response with calculations.