Target costing (LO3). True to its name, Imaging Technologies produces testing equipment used by forges to test their products. Imaging is considering a new X-ray machine that substantially enhances...

used by forges to test their products. Imaging is considering a new X-ray machine that substantially enhances the functionality of the product it would replace. Imaging believes that it might be able to sell 4,500 units of the new product at an average price of $5,000 per unit. Management specifies a target profit margin of 5% return on sales.

Required:

a. Compute the product’s allowable cost per unit.

b. Suppose the product’s current cost is $4,900 per unit. What is the cost gap (i.e., the total cost reduction that must be accomplished during the target costing process)?