Exam 15: Target Costing and Cost Analysis for Pricing Decisions

Correct Answer:

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A. The total production cost is $70 ($18 + $36 + $16), and the addition of a 20% markup yields an $84 selling price ($70 × 120%). Unless the new component has some extra features that consumers find attractive, overall sales might suffer because $84 exceeds the expected competitive price of $75.
B. $75 (the expected competitive selling price)
C. Baker's markup is $14 ($84 - $70), which is 16.67% of the current $84 selling price ($14 ÷ $84). To achieve a 16.67% markup on a $75 selling price, the company must reduce its production costs by $7.50. $$\begin{array} { l r } \text { Selling price } & \$ 75.00 \\\text { Less: } 16.67 \% \text { markup } ( \$ 75 \times 16.67 \% ) & \underline { 12.50 } \\\text { Target cost } & \underline { \underline { \$ 62.50 } } \\& \\\text { Current cost } & \$ 70.00 \\\text { Less: Target cost } & \underline { 62.50 } \\\text { Required cost reduction } & \underline { \$ 7.50 }\end{array}$$ D. Baker can use value engineering, which focuses on cost reduction and process improvement. Information is collected about a product's design and manufacturing processes, and attempts are made to identify areas of change and where general improvements in efficiency are possible.