Exam 15: Target Costing and Cost Analysis for Pricing Decisions

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

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.

Superior Company is involved in a competitive bidding situation. The following costs are anticipated for a project to be bid with the City of Southlake: Direct material \ 340,000 Direct labor 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 Superior has excess capacity?

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

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?

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

If a company uses a cost-plus approach to pricing, it will find that there are several different definitions of cost and the higher the cost, the higher the markup percentage.

The revenue curve shows the relationship between the sales price and quantity sold.

If the volume sold reacts strongly to changes in price, demand:

Madison produces bicycles in a highly competitive market. During the past year, the company has added a 30% markup on the $250 manufacturing cost for one of its most popular models. A new competitor manufactures a similar model, has established a $300 selling price, and is seriously eroding Madison's market share. Management now desires to use a target-costing approach to remain competitive and is willing to accept a 20% return on sales. If target costing is used, which of the following choices correctly denotes (1) the price that Madison will charge and (2) company's target cost?

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 variable manufacturing cost and a markup percentage of 220%?

Wagner Furniture manufactures easy-to-assemble wooden furniture for home and office. The firm is considering modification of a bookcase, and the company's marketing department surveyed potential buyers regarding five proposed changes (A-E). The buyers' responses, in order of preference, along with Wagner's related unit costs for the modifications, follow. Order of Preference Change Cost 2 \ 7.50 2 5.00 3 4.00 4 1.50 5 5.50 The bookcase currently costs $81 to produce and distribute, and Wagner's selling price for this unit averages $108. An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that Wagner is considering and other models having only a few. The current manufacturers' selling prices on these bookcases average $120. Required: A. Why is there a need in target costing to (a) focus on the customer and (b) have a marketing team become involved with product design? B. Management desires to earn approximately the same rate of profit on sales that is being earned with the current design. 1. If Wagner uses target costing and desires to meet the current competitive selling price, what is the maximum cost of the modified bookcase? 2. Which of the modifications should Wagner consider? C. Assume that Wagner wanted to add a modification or two that you excluded in your answer to requirement "B2." What process might management adopt to allow the company to make its target profit for the bookcase? Briefly explain.

The following data pertain to Waters Corporation's residential humidifier: 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 humidifier, the markup percentage on total unit cost is 12%. Required: A. Calculate the fixed selling and administrative cost allocated to each humidifier. B. For each of the following bases, determine the appropriate percentage markup on cost that will result in a target price of $450 per humidifier: (1) variable manufacturing cost, (2) absorption manufacturing cost, and (3) total variable cost. (Round percentages to the nearest one-hundredth of a percent.)

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

Consider the following statements about pricing: I. Prices are often determined by the market, subject to the constraint that costs must be covered in the long run. II. Prices are often based on costs, subject to the constraint that customers and competitors will exert an influence. III. A balance of market forces and cost is important when making pricing decisions. Which of the above statements is (are) true?

If a particular job takes 20 hours of labor and $800 of materials, the price charged for the job is:

The following costs relate to Southside 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 Southside uses absorption manufacturing-cost pricing formulas, the company's markup percentage would be computed on the basis of:

Paul's Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data: Annual overhead costs: Material handling and storage \ 15,000 Other overhead costs 75,000 Annual cost of materials used 187,500 Labor rate per hour, including fringe benefits 18 Hourly charge to achieve profit margin 11 The time charge per hour is:

Lyman currently sells an industrial mixer for $900 that market leaders sell for $820. The current costs to manufacture and distribute the mixer total $645, and the company has a profit goal of 30% of sales. Lyman uses target costing in its efforts to be a leader in the marketplace. On the basis of this information, (1) what should Lyman consider to be the initial driver of the target-costing process and (2) what amount of cost reduction is needed for the company to achieve its goals?

Algeria Transport Company has average invested capital of $800,000 and a target return on investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units. Albany's markup percentage on total cost is: