Exam 12: Pricing Decisions and Cost Management

Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods' policy to add a 50% markup to full costs. a. Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time-only special order? b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?

Cost-plus pricing starts with what customers are willing to pay, and then adds a desired profit.

Two different approaches to pricing decisions are market based and cost based.

The department usually in the best position to identify customers' needs is the:

Answer the following questions using the information below: Thornton Company has invested $2,000,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $360,000 annually. The company plans annual sales of 7,000 juicer machines at a selling price of $400 each. -What is the target rate of return on investment for Thornton Company?

Product cost analysis is important even if market forces set prices.

The cost-plus pricing approach is generally in the form:

Answer the following questions using the information below: Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. -Iowa Utility Company charges its high-usage commercial customers a lower rate per kilowatt-hour than other customers. This is an example of:

Answer the following questions using the information below: Delgreco Products manufactures high-tech cell phones. Delgreco Products has a policy of adding a 30% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: -Delgreco Products is approached by an overseas customer to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for a one-time setup charge of $15,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order?

One goal of target costing is to keep costs below the target price.

Warthog Avionics currently sells radios for $3,600. It has costs of $2,800. A competitor is bringing a new radio to market that will sell for $3,200. Management believes it must lower the price to $3,200 to compete in the market for radios. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Warthog's sales are currently 1,000 radios per year. Required: a. What is the target cost if target operating income is 25% of sales? b. What is the change in operating income if marketing 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 is correct?

Companies must always examine pricing decisions through the eyes of their customers.

Answer the following questions using the information below: Frank's Computer Monitors, Inc., currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors per year. -What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?

The amount of markup percentage is usually higher if:

In target costing, what are at least two techniques used to achieve target costing goals?

Answer the following questions using the information below: Oscar Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Oscar has an annual target operating income of $900,000. -The markup percentage for setting prices as a percentage of total manufacturing costs is:

Answer the following questions using the information below: Frank's Computer Monitors, Inc., currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors per year. -When the firm uses the target-costing approach to pricing, the target cost per unit is the difference between the per unit target price and the per unit target:

The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating income is referred to as:

Answer the following questions using the information below: Caruso Cool manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $190 per air conditioner, consisting of 75% variable costs and 25% fixed costs. The company has surplus capacity available. It is Caruso Cool's policy to add a 30% markup to full costs. -Caruso is invited to bid on a one-time-only special order to supply 50 air conditioners. What is the lowest price Caruso should bid on this special order?

Compare target costing and kaizen costing.