Exam 15: Target Costing and Cost Analysis for Pricing Decisions

Use the following information to answer the following Questions Longwood, Inc. manufactures various lines of computer equipment and is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: The average amount of capital invested in the laptop product line is $900,000 and Longwood’s target return on investment is 18%. -If Longwood uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be:

Which of the following cost-reduction and process-improvement techniques is often used in conjunction with target costing?

When a firm has excess capacity, a price that covers the incremental costs incurred because of the job will contribute toward covering the company's fixed cost and profit.

Which of the following pricing practices is illegal?

Value engineering is an outgrowth of target costing.

In many cases, traditional, volume based product costing may overcost low-volume and complex products, while undercosting high-volume and relatively simple products.

A number of antitrust laws have been enacted that affect product pricing. Required: A. Define price discrimination and predatory pricing. B. Assume that a company has been charged with price discrimination. What role can cost information play in defending the firm's pricing practices?

If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the variable cost per unit is $450, then the markup percentage on variable cost would be:

The curve that shows the relationship between the sales price and quantity sold is called the:

Which of the following management tools is a key component of target costing?

When introducing new products, some companies use price skimming whereas others use penetration pricing. Required: A. Distinguish between price skimming and penetration pricing. B. Is price skimming a viable alternative for most new products? Explain.

Consider the following statements about pricing and the law: I. American antitrust laws restrict certain types of pricing behavior. II. The term "price discrimination" involves charging different prices to different customers for the same goods and services. III. Charging different prices to different customers for the same goods is permissible if price differences are based on cost differences of producing and/or selling the good. Which of the above statements is (are) true?

The following data pertain to Frontier Enterprises: What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 110%?

The following questions explore the relationships between total and marginal functions in the economic profit-maximizing (EPM) model: Required: A. The total revenue function rises over the range of operating activity portrayed in the text. Why does the marginal revenue function decrease? B. What is the behavior of the marginal cost curve? C. In the EPM model, where is the profit-maximizing volume level? Explain.

Riverview Manufacturing, which produces electrical components, is contemplating submitting a bid for 30,000 units of item no. 54. The bid's cost will be follows: The special device will be purchased for this job and once the job is completed, the device will be discarded. Riverview applies total manufacturing overhead of $5 to each unit (0.5 machine hours at $10 per hour). This figure is based, in part, on budgeted yearly fixed overhead of $1,440,000 and an anticipated volume of 480,000 machine hours (40,000 per month). Riverview is presently working at 85% of capacity, and the client needs the order in two months. Required: A. Is Riverview's current operating environment one of excess capacity or no excess capacity? Briefly explain. B. If Riverview had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the order? C. Can Riverview produce this order in the required time frame of two months? Explain. D. Suppose that Riverview is in marginal financial health. Explain the benefits and problems of approaching the bidding procedure with (1) a low bid or (2) a high bid.

Use the following information to answer the following Questions The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available: -What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 220%?

The following costs relate to Tower Company: Variable manufacturing cost, $30; variable selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated fixed selling and administrative cost, $4. - If Tower uses absorption manufacturing-cost pricing formulas, the company's markup percentage would be computed on the basis of:

Much of the historical development of the target-costing approach has taken place in German industry.

If a company has excess capacity, which of the following is a sensible bidding strategy?

Use the following information to answer the following Questions The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available: -What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 120%?