Exam 15: Target Costing and Cost Analysis for Pricing Decisions

Rudy Enterprises currently sells a piece of luggage for $200. An aggressive competitor has announced plans for a similar product that will be sold for $170. Rudy's marketing department believes that if the price is dropped to meet competition, unit sales will increase by 10%. The current cost to manufacture and distribute the luggage is $130, and Rudy has a profit goal of 30% of sales. If Rudy meets competitive selling prices, what must happen to the company's manufacturing and distribution cost?

Consider the following statements about absorption-cost pricing formulas: I. Absorption-cost formulas consider a company's fixed manufacturing costs when establishing a selling price. II. Absorption-cost formulas are often justified on the grounds that a company must cover all of its costs in the long run. III. Absorption-cost data are the type that managers need when facing certain pricing decisions, such as whether or not to accept a special order. Which of the above statements is (are) true?

Astro, Inc. uses target costing and will soon enter a very competitive marketplace in which it will have limited influence over the prices that are charged. Management and consultants are working to fine-tune the company's sole service, which hopefully will generate a 12% return (profit) on the firm's $24,000,000 asset investment. The following information is available: Hours of service to be provided: 34,000 Anticipated variable cost per service hour: $30 Anticipated fixed cost: $2,560,000 per year Required: A. How much profit must Astro produce to achieve a 12% return? B. Calculate the revenue per hour that Astro must generate to achieve a 12% return. C. Assume that prior to entering the marketplace, management conducted a planning exercise to determine whether a 14% return could be attained in year no. 2. Can the company achieve this return if (a) competitive pressures dictate a maximum selling price of $195 per hour and (b) service hours, variable cost per service hour, and fixed costs are the same as the amounts anticipated in year no. 1? Show calculations. D. If your answer to part "C" is "no," suggest and briefly describe a procedure that Astro might use to achieve desired results.

The four tasks that follow take place with the concept known as target costing: 1-Value engineering. 2-Establish a target selling price. 3-Establish a target cost. 4-Establish a target profit. Which of the following choices depicts the correct sequence of these tasks?

The following data pertain to Tannebaum Corporation's residential humidifier: To achieve a target price of $450 per humidifier, the markup percentage on total unit cost is 12%. Required: A. Calculate the fixed selling and administrative cost allocated to each humidifier. B. For each of the following bases, determine the appropriate percentage markup on cost that will result in a target price of $450 per humidifier: (1) variable manufacturing cost, (2) absorption manufacturing cost, and (3) total variable cost. (Round percentages to the nearest one-hundredth of a percent.)

Cost distortion can occur under the target-costing approach.

Allred Furniture manufactures easy-to-assemble wooden furniture for home and office. The firm is considering modification of a bookcase, and the company's marketing department surveyed potential buyers regarding five proposed changes (A-E). The buyers' responses, in order of preference, along with Allred's related unit costs for the modifications, follow.

From an economic perspective, a company's profit-maximizing quantity is found where:

Which of the following statements regarding price elasticity is false?

Penetration pricing is a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share.

If a company uses a cost-plus approach to pricing, it will find that there are several different definitions of cost and the higher the cost, the higher the markup percentage.

Harlen Company is involved in a competitive bidding situation. The following costs are anticipated for a project to be bid with the City of Crimson: Which of the following cost figures should be used in setting a minimum bid price if Harlen has excess capacity?

With the time and material pricing method, the hourly time charge is typically set equal to:

Skimming pricing is another name for penetration pricing.

The marginal revenue curve shows the relationship between the change in total revenue that accompanies a change in quantity sold.

Setting prices requires a balance between cost considerations and market forces.

Target costing involves four key principles.

Which of the following terms describes a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share?

Time and material pricing is used widely by construction companies.

Alpine, Inc. sells a single product. The following information relates to the year just ended: Number of units sold: 40,000 Variable cost per unit: $200 Total fixed cost: $2,400,000 Operating income: $3,800,000 Required: A. Compute the company's selling price. B. Compute the percentage markup on total cost. Round your answer to two decimal places. C. Assume that Alpine desired to change its practice of computing a markup on total cost to a markup on variable cost. If the company wants to hold selling price constant, would the markup percentage increase or decrease? By how much?