Exam 13: Target Costing and Cost Analysis for Pricing Decisions

Which of the following pricing practices is illegal?

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

The Canadian Competition Act restricts certain types of pricing behaviour. 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?

Which of the following statements regarding price elasticity is false?

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.

Mission Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Shawnee School System, computed as follows: Construction materials \ 80,000 Labour costs 170,000 Total direct costs \ 250,000 Construction overhead -30\% of labour 51,000 Allocated administrative overhead 20,000 Total cost \ 321,000 Mission adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In Shawnee's case the profit margin amounted to $50,000 ($250,000 x 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed. Required: A. If Mission had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can Mission justify this amount? B. If Mission had no excess capacity, what would be the lowest price that the company should charge? C. What is the primary benefit and problem of approaching a competitive bid situation with a low-bid philosophy?

For many years, Orbit Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 20% of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing. An example of Orbit's woes is typified by Item No. 710, which has the following unit-cost characteristics: direct materials, $50; direct labour, $90; manufacturing overhead, $40; and selling and administrative expenses, $20. The going market price for an identical product of identical quality is $210, which is below what Orbit is charging. Required: A. Contrast cost-plus pricing and target costing. B. What is Orbit's current selling price for Item No. 710? C. If Orbit used target costing for Item No. 710, what must happen to costs if the company desired to meet market prices and maintain its current rate of profit on sales?

The Gluten Free Company, which manufactures gluten free snack foods, is ready to introduce a new line of breakfast bars. The following data is available: Variable manufacturing cost \ 240 Variable selling and administrative cost 20 Applied fixed manufacturing cost 80 Allocated fixed selling and administrative cost 65 What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 180%?

The following data pertain to Kluver Business Solutions Inc.: variable manufacturing cost $60; variable selling and administrative cost $30; applied fixed manufacturing cost $30; allocated fixed selling and administrative cost $12. What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 80%?

Parkside Recreation is exploring a competitive bidding situation. The firm, which currently has no excess capacity, estimates the following costs for a project to be performed for the Morningside School District: Direct material \ 220,000 Direct labour 130,000 Nllocated variable overhead 91,000 Allocated fixed cost 40,000 Which of the following cost figures would be used in determining a minimum price if Parkside decides to bid on the Morningside project?

Under which of the following conditions are prices said to be elastic?

An Activity Based Costing (ABC) system plays an important role in setting a target cost because

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

Which of the following is not a key feature of target costing?

The following data pertain to Parson Corporation's portable air conditioner: Variable manufacturing cost \ 240 Applied fixed manufacturing cost 80 Variable selling and administrative cost 60 Allocated fixed selling and administrative cost ? To achieve a target price of $450 per air conditioner, the markup percentage on total unit cost is 12%. Required: A. Calculate the fixed selling and administrative cost allocated to each air conditioner. B. For each of the following bases, determine the appropriate percentage markup on cost that will result in a target price of $450 per air conditioner: (1) variable manufacturing cost, (2) absorption manufacturing cost, and (3) total variable cost. (Round percentages to the nearest one-hundredth of a percent.)

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:

Which of the following represents the cost-plus pricing formula?

Bateson Inc. 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:

Kleenrite Company manufactures a single product that has a cost of $450. The company uses a 40% markup on cost to arrive at a selling price of $630, which results in a price that virtually always exceeds that of its competitors, the market leaders. If Kleenrite changes to the approach known as target costing, the company will first:

Argosy Incorporated 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 Argosy produce to achieve a 12% return? B. Calculate the revenue per hour that Argosy 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 Argosy might use to achieve desired results.