Exam 15: Target Costing and Cost Analysis for Pricing Decisions

In a typical business, the firm's overall demand would be influenced by interactions of pricing policies and:

Which of the following features is typically absent in target costing?

Green Park 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 labor 130,000 Allocated variable overhead 91,000 Allocated fixed cost 40,000 Which of the following cost figures would be used in determining a minimum price if Green Park decides to bid on the Morningside project?

Argosy, 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 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.

Joster 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 Oxford. Costs for the job are as follows: Raw materials \ 140,000 Labor costs 330,000 Variable overhead ( 20\% of labor) 66,000 Fixed overhead ( 45\% of labor) 148,500 Allocated administrative cost 48,000 Total cost \ 732,500 Joster's labor force is paid an average of $22 per hour and if the company wins the bid, it will have three months to complete the work. Management adds a 30% profit margin to all jobs, computed on the basis of total variable cost. Required: A. Compute the lowest total cost that the company would use when figuring its bid, assuming that Jester has excess capacity. B. Compute Joster's bid if the company has no excess capacity. C. Assume that Joster is currently working at 85% of capacity. Does the firm have sufficient time to complete the job? If not, what could the company do if it desires to do business with Oxford?

If a company has excess capacity, a sensible bidding strategy is to base the bid on the incremental costs incurred because the job will contribute toward the company's profit.

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

Goldman Corporation uses time and material pricing. The repair department expects 20,000 direct labor hours of activity and has the following selected data: The company's time charge per hour is:

The following costs relate to Southern Company: Variable manufacturing cost, $30; variable selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated fixed selling and administrative cost, $4. If Southern uses total-cost pricing formulas, the company's markup percentage would be computed on the basis of:

The Razooks Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available: Variable manufacturing cost \ 180 Applied fixed manufacturing cost 90 Variable selling and administrative cost 60 Allocated fixed selling and administrative cost 75 What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 40%?

The following data pertain to Polar Company's commercial snow thrower: Variable manufacturing cost \ 400 Applied fixed manufacturing cost 160 Variable selling and administrative cost 60 Allocated fixed selling and administrative cost 25 Required: For each of the following cost bases, determine the appropriate percentage markup that will result in a price of $980 for the snow thrower. (Round percentages to nearest one-hundredth of a percent.) A. Variable manufacturing cost. B. Absorption manufacturing cost. C. Total cost. D. Total variable cost.

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

Radner 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, Radner 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. Radner's 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. Radner 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 Radner consider before a final decision is made about the facility?

The following data pertain to Quincey Enterprises: Variable manufacturing cost \ 60 Variable selling and administrative cost 10 Applied fixed manufacturing cost 30 Allocated fixed selling and administrative cost 5 What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 60%?

Jaycee Manufacturing, which produces electrical components, is contemplating submitting a bid for 30,000 units of item no. 54. The bid's cost will be follows: Raw materials \ 75,000 Direct labor 120,000 Manufacturing overhead 150,000 Additional set-up costs 3,000 Special device 5,000 Allocated administrative overhead 12,000 Total cost The special device will be purchased for this job and once the job is completed, the device will be discarded. Jaycee applies total manufacturing overhead of $5 to each unit (0.5 machine hours at $10 per hour). This figure is based, in part, on budgeted yearly fixed overhead of $1,440,000 and an anticipated volume of 480,000 machine hours (40,000 per month). Jaycee is presently working at 85% of capacity, and the client needs the order in two months. Required: A. Is Jaycee's current operating environment one of excess capacity or no excess capacity? Briefly explain. B. If Jaycee had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the order? C. Can Jaycee produce this order in the required time frame of two months? Explain. D. Suppose that Jaycee is in marginal financial health. Explain the benefits and problems of approaching the bidding procedure with (1) a low bid or (2) a high bid.

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:

Mojave Corporation manufactures a single product that has a cost of $350. The company uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that virtually always exceeds that of the market leaders. If Mojave changes to the approach known as target costing, the company will first:

What is price skimming?

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

Quality Exteriors installs stucco on high-priced custom homes, using the time-and-materials method to price jobs for individual builders. Quality 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. Quality 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, Quality performed 24 jobs for Don Henderson Builders, using 3,100 labor hours and $72,000 of materials. Required: Calculate the amount that Quality would bill Don Henderson Builders for work performed.