Exam 15: Target Costing and Cost Analysis for Pricing Decisions

In a competitive bidding situation where all of the companies submitting bids offer a roughly equivalent product or service, the amount of variable overhead becomes the sole criterion for selecting the contractor.

Consider the following statements about why prices are often based on product costs: I. Companies sell many products and services, and cost-based approaches provide a simple and direct pricing method. II. The cost of a product or service provides a lower limit or floor, below which price should not be set in the long run. III. Determining a company's demand and marginal revenue curves is difficult, costly, and time consuming. Which of the above statements is (are) true?

Consider the following statements about competitive bidding: I. The higher the price that a company bids, the greater the profit if the firm gets the contract. II. Bidding a higher price increases the probability of obtaining a contract. III. A company that bids low to ensure acceptance of a contract may actually wind up bidding too low to make an acceptable profit. Which of the above statements is (are) true?

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

Polson Pool Company is involved in a number of competitive bidding situations. The following costs are anticipated for a project to be bid for Terrance Manufacturing: Which of these costs would be treated differently if Polson had either excess capacity or no excess capacity?

Frontage Corporation, which has a maximum labor capacity of 30,000 hours per month, has considerable flexibility with its customers when it comes to project completion dates. Management is considering the submission of a bid for a job to be performed for the city of Carthage. Costs for the job are as follows:

Rollins and Associates develops hotels in resort locations. The company is exploring the construction of a new facility that would have significant meeting and banquet space for conventions and conferences, and sleeping rooms that average 850 square feet. The accounting department estimates that land and building costs will amount to $60 and $120 per square foot of floor area, respectively. Other expenditures during construction for interest, real estate taxes, and general overhead are expected to total 35% of land and construction cost. Once basic construction is completed, Rollins anticipates per-room initial expenditures for: The accounting department suggests that 10% be added to the total of all preceding costs to allow for estimation errors. Construction is anticipated to take two years. Rollins' pricing policy is consistent with that of industry leaders, namely, to set a room rate equal to .1% (.001) of cost. Upon completion, comparable facilities are expected to charge $240 per day. Required: A. Compute the total cost of a sleeping room at the new facility. B. Is the company's room rate competitive? Briefly explain. C. Rollins desires to enter this market by adhering to the industry standard and charging a competitive room rate. If needed, the firm will look for ways to cut expenditures. Briefly explain the difference between cost-plus pricing and target costing. D. Other than operating costs and room revenues, what else should Rollins consider before a final decision is made about the facility?

On a graph where the horizontal axis represents quantity sold and the vertical axis represents selling price, the basic demand curve in a competitive market can be graphed:

The following data pertain to Laramie Enterprises: What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 60%?

When determining the markup to be used in a cost-plus pricing formula, many companies base the markup on a target:

Which of the following formulas represents the markup percentage on total cost?

Musik Corporation uses a 140% markup on total cost and recently computed a selling price of $1,560 for a particular product. On the basis of this information, the product's total cost is:

When pricing products, many companies use target costing and/or cost-plus pricing methods. Required: A. Briefly explain how target costing is applied to new products. B. How does target costing differ from cost-plus pricing? C. Can an activity-based costing system be used with target costing? Explain

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%. -What price must Longwood charge if the company uses cost-plus pricing based on total cost?

Which of the following can influence a company's pricing decisions?

Exquisite Exteriors installs stucco on high-priced custom homes, using the time-and-materials method to price jobs for individual builders. Exquisite anticipates using $250,000 of materials during the year and will incur $15,000 for material handling and storage. Other overhead costs, which are driven by the company's 18,000 direct labor hours, will total $360,000. Exquisite pays construction crews $17 per labor hour and adds a markup of $19 per hour on its time charges. There is no profit markup on material cost. During the first quarter of the year, Exquisite performed 24 jobs for Don Henderson Builders, using 3,100 labor hours and $72,000 of materials. Required: Calculate the amount that Exquisite would bill Don Henderson Builders for work performed.

Under the time and material pricing approach, the company determines one charge for the labor used on a job, another charge for the materials, and then averages the two to apply one charge for everything.

One of the Congressional acts that restricts certain types of pricing behavior is the Robinson-Patman Act.

Which of the following is not a major influence on pricing decisions?

Which of the following terms describes a pricing strategy in which a new product's initial price is set high and then eventually lowered to appeal to a broader range of customers?