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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Cost-plus and target costing concepts
The following conversation took place between Dean Lancaster, vice president of marketing, and Dina Conaway, controller of Redwood Computer Company:

Dealt: I am really excited about our new computer coming out. 1 think ii will lx* a real market success.
Dina: I'm really glad you think so. I know that our success will In- determined by our price. If our price is too high, our competitors will be the ones with the market success.
Dean: Don't worry about it. We'll just mark our product cost up by 25% and it will all work out. I know we'll make money at those markups. By the way. what does the estimated product com look like?

Dina: Well, there's the rub. The product cost looks as if it's going 10 come in at around $1,000. With a 25% markup, that will give us a selling price of $1,250.
Dean: I see your concern. That's a little high. Our research indicates that computer prices are dropping and that (his type of computer should be selling for around $900 when we release it to the market.
Dina: I'm not sure what to do.
Dean: Let me see if I can help. How much of the $1,000 is fixed cost?
Dina: About $300.
Dean: There you go. The fixed cost is sunk. We don't need to consider it in our pricing decision. If we reduce the product cost by $300, the new price with a 25% markup would be right at $875. Boy, I was really worried for a minute there. 1 knew something wasn't right.

How might target costing be used to help solve this pricing dilemma?

To determine

Concept Introduction:

Target costing:

Target costing is the most popular part of costing in which a cost is to be estimated for the product by the company. In this, company plans in advance for the price points, product cost, and margin that it wants to be achieved for a product.

To find out:

The use of target costingin solving the dilemma of pricing in the question.

Explanation

In target costing, the companyfixes the selling price of the product after taking into effect all factors of the market for the product. Further, they compute the transfer cost by using following formula:

  Target cost=Selling Pr

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