Target costs, effect of process-design changes on service costs. Solar Energy Systems (SES) sells solar heating systems in residential areas of eastern Pennsylvania. A successful sale results in the homeowner purchasing a solar heating system and obtaining rebates, tax credits, and financing for which SES completes all the paperwork. The company has identified three major activities that drive the cost of selling heating systems: identifying new contacts (varies with the number of new contacts); traveling to and between appointments (varies with the number of miles driven); and preparing and filing rebates and tax forms (varies with the number of solar systems sold). Actual costs for each of these activities in 2016 and 2017 are:

After experiencing high costs in 2016, SES used value engineering to reduce the cost of selling solar heating systems. Managers at SES want to evaluate whether value engineering has succeeded in reducing the selling cost per sale by the targeted 8% in 2017. Actual results for 2016 and 2017 for SES are:

1. Calculate the cost per sale in 2016.

2. Calculate the cost per sale in 2017.

3. Did SES achieve the target cost per sale in 2017? Explain.

4. What challenges might managers at SES encounter in achieving the target cost and how might they overcome these challenges?

 

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