Deck 13: Target Costing and Cost Analysis for Pricing Decisions

Question 1

If a company uses a cost-plus approach to pricing, it will find:

A)there are several different definitions of cost and the higher the cost, the higher the markup percentage.
B)there are several different definitions of cost and the higher the cost, the lower the markup percentage.
C)there is one definition of cost, and no relationship between cost and the markup percentage used.
D)there is one definition of cost, and there is no markup percentage involved.
E)it is in violation of generally accepted accounting principles (GAAP).

Answer 1

B

Question 2

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

A)the company's reputation.
B)the quality of goods and services offered.
C)competing goods and services.
D)advertising and promotional campaigns.
E)internal control systems.

Answer 2

E

Question 3

When determining the markup to be used in a cost-plus pricing formula, many companies base the markup on a target:

A)return on investment.
B)sales margin.
C)capital turnover.
D)earnings per share.
E)debt-to-equity ratio.

Answer 3

A

Question 4

The difference between absorption manufacturing cost and total cost with respect to product pricing is caused by:

A)variable manufacturing cost.
B)applied fixed manufacturing cost.
C)variable selling and administrative cost.
D)allocated fixed selling and administrative cost.
E)variable selling and administrative cost and allocated fixed selling and administrative cost.

Question 5

Which of the following choices correctly denotes the collective factors that can influence a company's pricing practices for goods and services?

A)Costs, and Customer Demand.
B)Costs.
C)Market Conditions, Costs, and Customer Demand.
D)Market Conditions, and Costs.
E)Market Conditions, and Customer Demand.

Question 6

The following costs relate to JB Contraction Company: Variable manufacturing cost, $20; variable selling and administrative cost, $11; applied fixed manufacturing overhead, $12; and allocated fixed selling and administrative cost, $3. If JB uses absorption manufacturing-cost pricing formulas, the company's markup percentage would be computed on the basis of:

A)$15.
B)$20.
C)$31.
D)$32.
E)$46.

Question 7

Heathrow employs cost-plus pricing formulas to derive selling prices for its various products. If the formulas are all used correctly, which of the following cost bases will result in the highest selling price?

A)Variable manufacturing cost.
B)Absorption manufacturing cost.
C)Total variable cost.
D)Total cost.
E)They could all result in the same selling price as long as their markup percentages are different.

Question 8

Which of the following would least likely influence a company's pricing decisions

A)Manufacturing costs.
B)Competitors.
C)Customer demand.
D)Pricing laws.
E)Internal Controls.

Question 9

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

A)has no elasticity.
B)has negative elasticity.
C)is inelastic.
D)is elastic.
E)is unrealistic.

Question 10

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

A)Increase in price, and little impact on sales volume.
B)Increase in price, and a sizable increase in sales volume.
C)Increase in price, and a sizeable decrease in sales volume.
D)Decrease in price, and a sizeable increase in sales volume.
E)Decrease in price, and a sizeable decrease in sales volume.

Question 11

Which of the following statements regarding price elasticity is false?

A)The concept of price elasticity is an extension of the economic pricing model.
B)Demand is elastic if a price change has a large negative impact on sales volume.
C)Demand is elastic if price changes have no impact on sales volume.
D)Measuring price elasticity is an important objective of market research.
E)Demand is relatively inelastic if price changes have little impact on sales quantity.

Question 12

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

A)marginal revenue curve.
B)average cost curve.
C)profit curve.
D)demand curve.
E)revenue curve.

Question 13

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

A)Target profit ÷ Variable cost.
B)Target profit ÷ Annual volume.
C)(Target profit x Total cost per unit) ÷ Annual volume.
D)(Annual volume x Total cost per unit) ÷ Target profit.
E)Target profit ÷ (Annual volume x Total cost per unit).

Question 14

The following data pertain to Kluver Business Solutions Inc.: variable manufacturing cost $60; variable selling and administrative cost $30; applied fixed manufacturing cost $30; allocated fixed selling and administrative cost $12. What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 80%?

A)$90.
B)$108.
C)$135.
D)$162.
E)$216.

Question 15

Patterson and Clay Companies both use cost-plus pricing formulas and arrived at a selling price of $1,000 for the same product. Patterson uses absorption manufacturing cost as the basis for computing its dollar markup whereas Clay uses total cost. Which of the following choices correctly denotes the company that would have (1) the higher cost basis for deriving its dollar markup and (2) the higher markup percentage respectively?

A)Patterson, Patterson.
B)Patterson, Clay.
C)Clay, Patterson.
D)Clay, Clay.
E)The companies would have the same cost basis and markup percentage.

Question 16

The following data pertain to Wolter Incorporated: $\begin{array} { l r } \text { Variable manufacturing cost } & \$ 70 \\\text { Variable selling and administrative cost } & 20 \\\text { Applied fixed manufacturing cost } & 20 \\\text { Allocated fixed selling and administrative cost } & 4\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 50%?

A)$114.
B)$126.
C)$136.
D)$159.
E)$171.

Question 17

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

A)Price = Cost ÷ Markup percentage.
B)Price = Cost + (Markup percentage x Cost).
C)Price = Cost + Markup percentage.
D)Price = Cost + (Markup percentage + Cost).
E)Price = Markup percentage x Cost.

Question 18

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: $\begin{array} { | l | r | } \hline \text { Variable manufacturing cost } & \$ 240 \\\hline \text { Variable selling and administrative cost } & 20 \\\hline \text { Applied fixed manufacturing cost } & 80 \\\hline \text { Allocated fixed selling and administrative cost } & 65 \\\hline\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on variable manufacturing cost and a markup percentage of 200%?

A)$240.
B)$355.
C)$720.
D)$740.
E)$780.

Question 19

Under which of the following conditions are prices said to be elastic?

A)Increase in price, and little impact on sales volume.
B)Increase in price, and a sizable increase in sales volume.
C)Increase in price, and a sizeable decrease in sales volume.
D)Decrease in price, and no increase in sales volume.
E)Decrease in price, and a sizeable decrease in sales volume.

Question 20

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

A)Planning and control policies of the firm.
B)Customer demand.
C)Costs.
D)Competitors.
E)Political, legal, and image-related issues.

Question 21

Kleenrite Company manufactures a single product that has a cost of $450. The company uses a 40% markup on cost to arrive at a selling price of $630, which results in a price that virtually always exceeds that of its competitors, the market leaders. If Kleenrite changes to the approach known as target costing, the company will first:

A)undertake a thorough analysis of competitors' prices.
B)change the markup so that it is based on sales rather than based on cost.
C)reduce its 40% markup rate.
D)trim its $450 cost.
E)attempt to re-engineer its product.

Question 22

What is price skimming?

A)The initial price is set low and kept constant.
B)The initial price is set low and then raised.
C)The initial price is set high and later lowered.
D)The initial price is set high and kept constant.
E)The initial price is set high and then raised.

Question 23

Bateson Inc. 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:

A)$650.00.
B)$910.00.
C)$1,114.29.
D)$1,560.00.
E)$2,184.00.

Question 24

An Activity Based Costing (ABC) system plays an important role in setting a target cost because

A)ABC encourages product designers to charge higher sales prices.
B)ABC encourages product designers to use a traditional product costing system.
C)ABC allows product designers to attempt cost improvement in particular activities.
D)ABC allows product designers to replace the manufacturing system.
E)ABC allows product designers to focus on how to increase the costs of manufacturing.

Question 25

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: $\begin{array} { | l | r | } \hline \text { Variable manufacturing cost } & \$ 240 \\\hline \text { Variable selling and administrative cost } & 20 \\\hline \text { Applied fixed manufacturing cost } & 80 \\\hline \text { Allocated fixed selling and administrative cost } & 65 \\\hline\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on absorption manufacturing cost and a markup percentage of 140%?

A)$320.
B)$576.
C)$768.
D)$788.
E)$972.

Question 26

The four tasks that follow take place with the concept known as target costing: 1-Value engineering.
2-Establish a target selling price.
3-Establish a target cost.
4-Establish a target profit.
Which of the following choices depicts the correct sequence of these tasks?

A)1, 3, 4, 2.
B)3, 1, 4, 2.
C)2, 4, 3, 1.
D)2, 3, 1, 4.
E)2, 1, 3, 4

Question 27

Cost distortion fails to capture the cost implications of product diversity and therefore it:

A)can result in strategic pricing errors.
B)can result in strategic pricing success.
C)can result in target pricing success.
D)can result in increased sales.
E)can result in satisfied customers.

Question 28

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? $\begin{array} { | l | l | l | } \hline & \text { Company A } & \text { Company B } \\\hline 1 & \text { Predatory } & \text { Skimming } \\\hline 2 & \text { Penetration } & \text { Predatory } \\\hline 3 & \text { Skimming } & \text { Penetration } \\\hline 4 & \text { Skimming } & \text { Predatory } \\\hline 5 & \text { Predatory } & \text { Penetration } \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 29

Fourteenth Street Ltd. desires to enter the market with a new product. If the Company uses target costing, which task would the company perform first?

A)Design and engineer the product.
B)Determine the products cost.
C)Determine the desired profit margin.
D)Determine the suggested selling price.
E)Research the market.

Question 30

Montana 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 Montana'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 Montana will charge and (2) company's target cost respectively?

A)300, 210
B)300, 240
C)300, 250
D)325, 240
E)325, 250

Question 31

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?

A)Penetration pricing.
B)Price skimming.
C)Customer pricing.
D)Designed pricing.
E)Market-share pricing.

Question 32

If Dexter uses cost-plus pricing based on absorption cost, the markup percentage the company must use would be:

A)15.72%.
B)21.64%.
C)29.56%.
D)58.93%.

Question 33

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?

A)$41.
B)$48.
C)$164.
D)$175.
E)$192

Question 34

Dexter Incorporated, which manufactures various lines of computer equipment, is planning to introduce a new line of laptops. Current plans call for the production and sale of 1,000 units, with estimated costs as follows: $\begin{array} { | c | r | r | } \hline \text { Variable costs: } & & \\\hline \text { Manufacturing } & \$ 450,000 & \\\hline \text { Selling and administrative } & 100,000 & \\\hline \text { Total variable costs } & & \$ 550,000 \\\hline \text { Fixed costs: } & & \\\hline \text { Manufacturing } & \$ 300,000 & \\\hline \text { Selling and administrative } & 180,000 & \\\hline \text { Total fixed costs } & & 480,000 \\\hline \text { Total costs } & & \$ 1.030,000 \\\hline\end{array}$ The average amount of capital invested in the laptop product line is $900,000 and Dexter's target return on investment is 18%. What price must Dexter charge if the company uses cost-plus pricing based on total cost?

A)$868.
B)$900.
C)$1,000.
D)$1,192.
E)$1,215.40.

Question 35

If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the variable cost per unit is $450, then the markup percentage on variable cost would be:

A)27.8%
B)104.56%.
C)105.56%.
D)107.00%.
E)106.85%.

Question 36

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: $\begin{array} { | l | r | } \hline \text { Variable manufacturing cost } & \$ 240 \\\hline \text { Variable selling and administrative cost } & 20 \\\hline \text { Applied fixed manufacturing cost } & 80 \\\hline \text { Allocated fixed selling and administrative cost } & 65 \\\hline\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 60%?

A)$384.
B)$405.
C)$512.
D)$616.
E)$648.

Question 37

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: $\begin{array} { | l | r | } \hline \text { Variable manufacturing cost } & \$ 240 \\\hline \text { Variable selling and administrative cost } & 20 \\\hline \text { Applied fixed manufacturing cost } & 80 \\\hline \text { Allocated fixed selling and administrative cost } & 65 \\\hline\end{array}$ What price will the company charge if the firm uses cost-plus pricing based on total variable cost and a markup percentage of 180%?

A)$56.
B)$260.
C)$468.
D)$728.
E)$729.

Question 38

Which of the following is not a key feature of target costing?

A)The use of cross-functional teams.
B)A focus on the customer.
C)A focus on product design.
D)A focus on process design.
E)A focus on application of fixed manufacturing cost.

Question 39

Which of the following terms describes a pricing strategy in which a new product's initial price is set relatively low in order to gain a large market share?

A)Penetration pricing.
B)Price skimming.
C)Customer pricing.
D)Designed pricing.
E)Market-share pricing.

Question 40

Oasis Inc. 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. Oasis' markup percentage on total cost is:

A)9.375%.
B)15.00%
C)24.00%.
D)47.50%.
E)62.50%.

Question 41

Shea Shorts Inc. (SSI) manufactures electrical wiring, which is used in the production of air conditioners and small electronics. Per-metre information is as follows.
SSI 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 per metre.
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?

Question 42

Under the time and material pricing method, a customer would be charged for:

A)material costs.
B)material and labour costs.
C)material, labour, and overhead costs.
D)material and labour costs, plus a profit margin.
E)material, labour, and overhead costs, plus a profit margin.

Question 43

Kendrick Corporation sells a single product. The following information relates to the year just ended:
Number of units sold: 20,000
Variable cost per unit: $300
Total fixed cost: $3,000,000
Operating income: $4,200,000
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 Kendrick 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?

Question 44

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: $\begin{array}{lc}\text { Labour and fringe benefit costs } & \$ 900,000 \\\text { Overhead costs } & 390,000 \\\text { Target profit } & 210,000\end{array}$ The company's time charge per hour is:

A)$7.
B)$13.
C)$30.
D)$43.
E)$50.

Question 45

Jensen Marine Supplies Inc. uses time and material pricing. The Mechanics Department, which anticipates 20,000 direct labour hours of activity, has the following data: $\begin{array}{l}\text { Annual overhead costs: }\\\begin{array} { l r } \text { Material handling and storage } & \$ 20,000 \\\text { Other overhead costs } & 60,000 \\\text { Annual cost of materials used } & 200,000 \\\text { Labour rate per hour, including fringe benefits } & 20 \\\text { Hourly charge to achieve profit margin } & 15\end{array}\end{array}$ If a particular job takes 20 hours of labour and $800 of materials, the price charged for the job is:

A)$880.
B)$900.
C)$1,772.
D)$1,640.
E)$1,900.

Question 46

Argosy Incorporated 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.

Question 47

If a company has excess capacity, which of the following is a sensible bidding strategy?

A)Set a price to cover all costs.
B)Base the bid on the incremental costs incurred because the job will contribute towards the company's cost and profit.
C)Base the bid solely on direct labour hours.
D)Downplay the potential impact of competitors.
E)Allocate common fixed costs to individual jobs before preparing the bid.

Question 48

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. 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?

Question 49

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

A)Set a price to cover all costs.
B)Base the bid on the incremental costs incurred because the job will contribute toward the company's profit.
C)Base the bid solely on direct labour hours.
D)Downplay the potential impact of competitors.
E)Try to minimize the company's tax liability.

Question 50

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

A)Linear programming.
B)Deterministic simulations.
C)Cost allocation.
D)Budgetary padding.
E)Value engineering.

Question 51

The following data pertain to Purcell Incorporated's Product No. 7:
Required:
For each of the following cost bases, determine the appropriate percentage markup that will result in a price of $800 for the Product No.7. (Round percentages to nearest one-hundredth of a percent.)
A. Variable manufacturing cost.
B. Absorption manufacturing cost.
C. Total cost.
D. Total variable cost.

Question 52

Overland Company is involved in a competitive bidding situation. Variable costs related to the project total $520,000, and allocated fixed cost is $95,000. Which of the following cost figures should be used in setting a minimum bid price if Overland has (1) excess capacity and (2) no excess capacity? $\begin{array} { | l | l | l | l | } \hline & \begin{array} { l } \underline {\text { Excess }} \\\underline {\text { Capacity }}\end{array} & & \begin{array} { l } \underline {\text { No Excess }} \\\underline {\text { Capacity }}\end{array} \\\hline 1 & \$ 0 & & \$ 0 \\\hline 2 & \$ 520,000 & & \$ 520,000 \\\hline 3 & \$ 520,000 & & \$ 615.000 \\\hline 4 & \$ 615,000 & & \$ 520,000 \\\hline 5 & \$ 615,000 & & \$ 615,000 \\\hline\end{array}$

A)1
B)2
C)3
D)4
E)5

Question 53

Which of the following management tools is a key component of target costing?

A)Management simulation.
B)Linear programming.
C)Value engineering.
D)Goal programming.
E)Performance reporting systems.

Question 54

With the time and material pricing method, the hourly time charge is typically set to:

A)the hourly labour cost.
B)the hourly labour cost + annual overhead.
C)the hourly labour cost + an hourly overhead charge + an hourly charge to cover the profit margin.
D)annual overhead + an hourly charge to cover the profit margin.
E)the hourly labour cost + an hourly charge to cover the profit margin.

Question 55

Which of the following pricing practices is illegal?

A)Penetration pricing.
B)Price skimming.
C)Predatory pricing.
D)Cost-based pricing.
E)Market-share pricing.

Question 56

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

Question 57

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: $\begin{array} { | l | r | } \hline \text { Direct material } & \$ 340,000 \\\hline \text { Direct labour } & 610,000 \\\hline \text { Allocated variable overhead } & 420,000 \\\hline \text { Allocated fixed cost } & 110,000 \\\hline\end{array}$ Which of the following cost figures should be used in setting a minimum bid price if Byrne has excess capacity?

A)$340,000.
B)$530,000.
C)$950,000.
D)$1,370,000.
E)$1,480,000

Question 58

Parkside 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: $\begin{array} { | l | r | } \hline \text { Direct material } & \$ 220,000 \\\hline \text { Direct labour } & 130,000 \\\hline \text { Nllocated variable overhead } & 91,000 \\\hline \text { Allocated fixed cost } & 40,000 \\\hline\end{array}$ Which of the following cost figures would be used in determining a minimum price if Parkside decides to bid on the Morningside project?

A)$131,000.
B)$220,000.
C)$350,000.
D)$441,000.
E)$481,000.

Question 59

Jensen Marine Supplies Inc. uses time and material pricing. The Mechanics Department, which anticipates 20,000 direct labour hours of activity, has the following data: $\begin{array}{l}\text { Annual overhead costs: }\\\begin{array} { l r } \text { Material handling and storage } & \$ 20,000 \\\text { Other overhead costs } & 60,000 \\\text { Annual cost of materials used } & 200,000 \\\text { Labour rate per hour, including fringe benefits } & 20 \\\text { Hourly charge to achieve profit margin } & 15\end{array}\end{array}$ The time charge per hour is:

A)$4.
B)$15.
C)$20.
D)$35.
E)$38.

Question 60

Jensen Marine Supplies Inc. uses time and material pricing. The Mechanics Department, which anticipates 20,000 direct labour hours of activity, has the following data: $\begin{array}{l}\text { Annual overhead costs: }\\\begin{array} { l r } \text { Material handling and storage } & \$ 20,000 \\\text { Other overhead costs } & 60,000 \\\text { Annual cost of materials used } & 200,000 \\\text { Labour rate per hour, including fringe benefits } & 20 \\\text { Hourly charge to achieve profit margin } & 15\end{array}\end{array}$ The amount to be added to each dollar of material cost to obtain the total material charge is:

A)$0.09.
B)$0.10.
C)$0.25.
D)$0.30.
E)$0.40.

Question 61

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: 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.

Question 62

The Canadian Competition Act restricts certain types of pricing behaviour.
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?

Question 63

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. 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"

Question 64

Jester Corporation, which has a maximum labour 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 Cambridge, Ontario. Costs for the job are as follows: Jester's labour 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 Jester's bid if the company has no excess capacity.
C. Assume that Jester 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 the city of Cambridge?

Question 65

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.

Question 66

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 labour hours, will total $360,000. Quality pays construction crews $17 per labour 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 labour hours and $72,000 of materials.
Required:
Calculate the amount that Quality would bill Don Henderson Builders for work performed.

Question 67

For many years, Orbit Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 20% of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing.
An example of Orbit's woes is typified by Item No. 710, which has the following unit-cost characteristics: direct materials, $50; direct labour, $90; manufacturing overhead, $40; and selling and administrative expenses, $20. The going market price for an identical product of identical quality is $210, which is below what Orbit is charging.
Required:
A. Contrast cost-plus pricing and target costing.
B. What is Orbit's current selling price for Item No. 710?
C. If Orbit used target costing for Item No. 710, what must happen to costs if the company desired to meet market prices and maintain its current rate of profit on sales?

Question 68

The controller for Halifax Photographic Supply has established the following cost pools and cost drivers: An order for 1,200 boxes of film-development chemicals has the following production requirements. Halifax established a target price by adding a 40% markup to total manufacturing cost.
Required:
A. Determine the order's target price by using the activity-cost pools.
B. Assume that Halifax used a single, combined overhead rate based on weight of raw materials.
1. Determine the predetermined overhead rate.
2. Determine the expected cost of the order.
3. Determine the target price.
4. Which approach above ("A" or "B") seems to be a more reasonable method to establish target prices? Explain.

Question 69

Scot Decor manufactures easy-to-assemble 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 Scot's related unit costs for the modifications, follow. The bookcase currently costs $62 to produce and distribute, and Scot's selling price for this unit averages $115. An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that Scot is considering and other models having only a few. The current manufacturers' selling prices on these bookcases average $125.
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 Scot 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 Scot consider?
3. Assume that Scot 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.

Question 70

When pricing products, many companies use target costing and/or cost-plus pricing methods.
Required:
A. Briefly explain how target costing is applied to new products.
B. How does target costing differ from cost-plus pricing?
C. Can an activity-based costing system be used with target costing? Explain

Question 71

Mission Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Shawnee School System, computed as follows: Mission 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 x 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed.
Required:
A. If Mission had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can Mission justify this amount?
B. If Mission 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?