Exam 15: Target Costing and Cost Analysis for Pricing Decisions

The following data pertain to Lomax Enterprises: Variable manufacturing cost \ 70 Variable selling and administrative cost 20 Applied fixed manufacturing cost 40 Allocated fixed selling and administrative cost 15 What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 110%?

Morrow Corporation manufactures part no. 67, which is used in the production of mountain bikes. Per-unit information about part no. 67 follows. Prevailing market price \ 33 Direct materials 14 Direct labor 6 Manufacturing overhead 7 Selling and administrative expenses 3 Morrow has traditionally used a 20% markup on total cost to arrive at a reasonable selling price. The company, though, has noticed a sizable drop in sales volume during the last few quarters, which it attributes to new entrants in the marketplace. Required: A. Compute the current selling price of part no. 67. B. If management desired to meet the prevailing market price and maintain the current rate of profit on sales, what must happen to the company's total manufacturing costs? By how much?

Consider the following statements about pricing and the law: I. American antitrust laws restrict certain types of pricing behavior. II. The term "price discrimination" involves charging different prices to different customers for the same goods and services. III. Charging different prices to different customers for the same goods is permissible if price differences are based on cost differences of producing and/or selling the good. Which of the above statements is (are) true?

Consider the following statements about competitive bidding: I. The higher the price that a company bids, the greater the profit if the firm gets the contract. II. Bidding a higher price increases the probability of obtaining a contract. III. A company that bids low to ensure acceptance of a contract may actually wind up bidding too low to make an acceptable profit. Which of the above statements is (are) true?

Montana 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:

The following data pertain to Lemon Enterprises: Variable manufacturing cost Variable selling and administrative cost Applied fixed manufacturing cost $\$ 70$ Allocated fixed selling and administrative cost What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 110%?

Prices are said to be inelastic under which of the following conditions?

Hershey, Inc. sells a single product. The following information relates to the year just ended: Number of units sold: 40,000 Variable cost per unit: $200 Total fixed cost: $2,400,000 Operating income: $3,800,000 Required: A. Compute the company's selling price. B. Compute the percentage markup on total cost. Round your answer to two decimal places. C. Assume that Hershey desired to change its practice of computing a markup on total cost to a markup on variable cost. If the company wants to hold selling price constant, would the markup percentage increase or decrease? By how much?

Consider the following statements about activity-based costing and its use in pricing: I. A company that uses target costing generally would have little need for activity-based costing. II. Companies that use cost-plus pricing methods would have little need for activity-based costing. III. The use of activity-based costing will often lead to better pricing decisions by managers. Which of the above statements is (are) true?

The curve that shows the relationship between the total sales revenue and quantity sold is called the:

Consider the following statements about absorption-cost pricing formulas: I. Absorption-cost formulas consider a company's fixed manufacturing costs when establishing a selling price. II. Absorption-cost formulas are often justified on the grounds that a company must cover all of its costs in the long run. III. Absorption-cost data are the type that managers need when facing certain pricing decisions, such as whether or not to accept a special order. Which of the above statements is (are) true?

In a cost-plus approach to pricing:

Belcher Company, which desires to enter the market with a new product, will perform the following tasks: 1-Design and engineer the product. 2-Determine the product's cost. 3-Determine the desired profit margin. 4-Determine the suggested selling price. If Belcher uses target costing, which task would the company perform first?

The curve that shows the relationship between the sales price and quantity sold is called the:

Company A uses a pricing approach where the initial price for a product is set high and then lowered, and Company B uses an approach where initial prices are set low in an effort to gain market share. What terms best describe these practices?

Under which of the following condition(s) are prices said to be elastic?

The curve that shows the change in total cost that accompanies a change in quantity produced and sold is called the:

High's 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 Labor costs 170,000 Total direct costs \ 250,000 Construction overhead-30\% of labor 51,000 Allocated administrative overhead 20,000 Total cost \ 321,000 High 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 × 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed. Required: A. If High had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can High justify this amount? B. If High 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?

A number of antitrust laws have been enacted that affect product pricing. 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?