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41 developing a product that satisfies the need of the potential customers is the fi 4301367

 

41) Developing a product that satisfies the need of the potential customers is the first step in implementing target pricing and target costing.

42) Carbon Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90. A competitor is introducing a new fishing pole that will sell for $110.00. Management believes it must lower the price to $110.00 to compete in the highly cost-conscious fishing pole market. Marketing department believes that the new price will allow Carbon to maintain the current sales level of 200,000 poles per year.

 

Required:

a.What is the target cost for the new price if target operating income is 25% of sales?

b.What is the change in operating income for the year if only the selling price is changed and costs remain the same?

c.What is the target cost per unit if the selling price is reduced to $110.00 and the company wants to maintain its same income level?

43) Julian Pharma manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

 

A competitor is introducing a new hospital bed similar to Deluxe that will sell for $3,800. Management believes it must lower the price to compete. The marketing department believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce.

 

Required:

a.What is the annual operating income from Deluxe at the current price of $5,000?

b.What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units increase by 25%?

c.What is the target cost per unit for the new price if target operating income is 30% of sales?

44) Marcon Tech Corp., currently sells radios for $7,000. It has costs of $5,400. A competitor is bringing a new radio to market that will sell for $5,850. Management believes it must lower the price to $5,850 to compete in the market for radios. The marketing department believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Marcon's sales are currently 1,000 radios per year.

 

Required:

a. What is the target cost for the new target price if target operating income is 20% of sales?

b. What is the change in operating income if marketing department is correct and only the sales price is changed?

c. What is the target cost if the company wants to maintain its same income level, and marketing department is correct in its estimation?

45) Sail Safe currently sells motor boats for $60,000. It has costs of $46,500. A competitor is bringing a new motor boat to the market that will sell for $55,000. Management believes it must lower the price to $55,000 to compete in the market for motor boats. The marketing department believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Sail Safe's sales are currently 2,000 motor boats per year. 3

 

Required:

 

a. What is the target cost for the new target price if target operating income is 20% of sales?

b. What is the change in operating income if marketing department is correct and only the sales price is changed?

c. What is the target cost if the company wants to maintain its same income level, and marketing department is correct?

 

46) What are the five steps that are followed while implementing target pricing and target costing?

 

47) What is the primary reason a firm would adopt target costing?

 

 

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