12 3 apply two of three pricing methods target pricing to set target costs and cost 4302819

 

12.3   Apply two of three pricing methods: target pricing to set target costs and cost-plus pricing.

 

1) Including unit fixed costs for pricing is often used because of its simplicity.

 

2) Target pricing includes: (1) developing a needed product, (2) choosing a target price, (3) deriving a target cost per unit, and (4) performing value engineering.

 

3) When prices are set in a competitive marketplace, product costs are the most important influence on pricing decisions.

 

4) Companies that produce high quality products do not have to pay attention to the actions of their competitors.

 

5) Relevant costs for pricing decisions include manufacturing costs, but not costs from other value-chain functions.

 

6) Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but not long-term pricing decisions.

Use the information below to answer the following question(s).

 

Pershing Company budgeted the following costs for the production of its one and only product, blades, for the next fiscal year:

 

Direct materials	$187,500
Direct labour	130,000
Factory overhead:
Variable	140,000
Fixed	107,500
Selling and administrative:
Variable	60,000
Fixed	80,000
Total costs	$705,000

 

Pershing has a target profit of $150,000.

 

7) What is the target profit percentage as a percentage of total manufacturing costs?

A) 61%

B) 21%

C) 47%

D) 27%

E) 35%

 

8) If total invested capital is $1,000,000, what is the company's target rate of return on investment?

A) 15 %

B) 20 %

C) 25 %

D) 30 %

E) 35 %

9) The target profit percentage for setting prices as a percentage of total variable costs would be

A) 47%.

B) 33%.

C) 29%.

D) 38%.

E) 61%.

 

10) The target profit percentage for setting prices as a percentage of total costs would be

A) 61%.

B) 21%.

C) 47%.

D) 27%.

E) 35%.