Exam 13: Target Costing and Cost Analysis for Pricing Decisions

Alarm Source Inc., which installs security alarm systems in new homes, prices jobs by using the time-and-materials method. The following data apply to a job for Treadwell Homes Builders: labour hours 206; material's cost $56,000. The following predictions, based on 20,000 direct labour hours, pertain to the company's operations for the year: Annual overhead costs: Material handling and storage \ 50,000 Other overhead costs 420,000 Annual cost of materials used 500,000 Labour rate per hour, including fringe benefits 38 Alarm Source Inc. adds a markup of $12 per hour on its time charges, but there is no profit markup on material costs. Required: Calculate the price for the Treadwell Homes Builders job.

Franklin Electronics currently sells a camera for $240. An aggressive competitor has announced plans for a similar product that will be sold for $205. Franklin'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 camera is $175, and Franklin has a profit goal of 20% of sales. If Franklin meets competitive selling prices, what is the company's target cost?

Byrne Inc. is involved in a competitive bidding situation. The following costs are anticipated for a project to be bid with the City of Kingston: Direct material \ 340,000 Direct labour 610,000 Allocated variable overhead 420,000 Allocated fixed cost 110,000 Which of the following cost figures should be used in setting a minimum bid price if Byrne has excess capacity?

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 absorption manufacturing cost and a markup percentage of 140%?

Baker Incorporated produces a number of components that are used in home theatre systems. Fred Biggs, head of the company's market research department, has identified the need for a new component that will most likely sell for $75. Projected volume levels are anticipated to reach 28,000 units in the first year, as several firmly entrenched competitors will be introducing a similar product in the not-too-distant future: Conversations with Baker's engineers and reviews of cost accounting data related to similar products that the company manufactures resulted in the following cost estimates for the new component. Direct materials \ 18 Direct labour 36 Manufacturing overhead 16 Selling and administrative 5 Baker currently uses cost-plus pricing and adds a 20% markup on total production cost to arrive at what is normally a competitive selling price. Required: A. What is the anticipated selling price of the new component if Baker uses its current pricing policy? What difficulties, if any, might the company face in the marketplace? B. Assume that Baker decides to switch to target costing. What price would the company charge for the new component? C. With the switch to target costing, what would Baker have to do to the component's manufacturing cost to achieve the normal profit margin on sales? Be specific and show calculations. D. Briefly describe a process that Baker can use to achieve your answer in requirement "C"

If a firm has no excess capacity, which of the following is a sensible bidding strategy?

In a typical business, the firm's overall demand would not be influenced by the combination of interactions of pricing policies and:

Ratner 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, Ratner anticipates per-room initial expenditures for. Sleeping room furnishings and accessories \ 16,000 Supplies 1,900 Marketing 5,500 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. Ratner's pricing policy is consistent with that of industry leaders, namely, to set a room rate equal to 1% of $1,000 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. Ratner 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 Ratner consider before a final decision is made about the facility?

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 variable manufacturing cost and a markup percentage of 200%?

Hewes Incorporated uses time and material pricing. The Repair Department department expects 30,000 direct labour hours of activity and has the following selected data: Labour and fringe benefit costs \ 900,000 Overhead costs 390,000 Target profit 210,000 The company's time charge per hour is:

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?