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Communication The following conversation took place betwee n Juanita Jackson, Vice President of Marketing, and Les Miles, Controller of Diamond Computer Company: Juanita: I am really excited about our new Computer coming out. I think it will be a real market success. Les: I'm really glad you think so. I know that our success will be determined by our price. If our price is too high, our competitors will be the ones with the market success. Juanita: 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 cost look like? Les: Well, there's the rub. The product cost looks as if it's going to come in at around $1,200. With a 25% markup, that will give us a selling price of $1,500. Juanita: I see your concern. That’s a little high. Our research indicates that Computer prices are dropping and that this type of Computer should be selling for around $1,250 when we release it to the market. Les: I'm not sure what to do. Juanita: Let me see if I can help. How much of the $1,200 is fixed cost? Les : About $200. Juanita: 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 $200, the new price with a 25% markup would lie right at $1,250. Boy, I was really worried for a minute there. I knew something wasn't right. Write a brief memo from Les Miles to Juanita Jackson (1) responding to her solution to the pricing problem, and (2) explaining how target costing could be used to solve the problem.

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

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Chapter
Section
BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 24, Problem 24.4CP
Textbook Problem
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Communication

The following conversation took place between Juanita Jackson, Vice President of Marketing, and Les Miles, Controller of Diamond Computer Company:

Juanita: I am really excited about our new Computer coming out. I think it will be a real market success.

Les: I'm really glad you think so. I know that our success will be determined by our price. If our price is too high, our competitors will be the ones with the market success.

Juanita: 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 cost look like?

Les: Well, there's the rub. The product cost looks as if it's going to come in at around $1,200. With a 25% markup, that will give us a selling price of $1,500.

Juanita: I see your concern. That’s a little high. Our research indicates that Computer prices are dropping and that this type of Computer should be selling for around $1,250 when we release it to the market.

Les: I'm not sure what to do.

Juanita: Let me see if I can help. How much of the $1,200 is fixed cost?

Les: About $200.

Juanita: 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 $200, the new price with a 25% markup would lie right at $1,250. Boy, I was really worried for a minute there. I knew something wasn't right.

Write a brief memo from Les Miles to Juanita Jackson (1) responding to her solution to the pricing problem, and (2) explaining how target costing could be used to solve the problem.

To determine
Write a brief memo from LM to DC Company.

Explanation of Solution

Memo

From

LM,

Controller,

Company DC

To

JJ,

VP Marketing,

Company DC

January 22, 2018

Sub: The pricing of new computer and target costing.

Hi J, this is in regard to our conversation earlier about the pricing or the new computer. This new computer is designed with the latest technology to reach out a greater people and cater to their specific needs. But the cost of this new model is of a greater concern now.

In our discussion we had thought of omitting the fixed costs, to achieve the desired profits. But on a second thought it may seem inappropriate. As this new model is an introduction of a new product in the company portfolio and not an incremental product, the revenues from the new model computer should contribute to fixed assets as well...

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Chapter 24 Solutions

Financial & Managerial Accounting
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Ch. 24 - Lease or sell Claxon Company owns a machine with a...Ch. 24 - Lease or sell Timberlake Company owns equipment...Ch. 24 - Discontinue a segment Product TS-20 has revenue of...Ch. 24 - Discontinue a segment Product B has revenue of...Ch. 24 - Make or buy A restaurant bakes its own bread for a...Ch. 24 - Make or buy A company manufactures various sized...Ch. 24 - Replace equipment A machine with a book value of...Ch. 24 - Replace equipment A machine with a book value of...Ch. 24 - Process or sell Product T is produced for 5.90 per...Ch. 24 - Process or sell Product D is produced for 24 per...Ch. 24 - Accept business at special price Product R is...Ch. 24 - Accept business at special price Product A is...Ch. 24 - Product cost markup percentage Magna Lighting Inc....Ch. 24 - Product cost markup percentage Green Thumb Garden...Ch. 24 - Bottleneck profit Product A has a unit...Ch. 24 - Bottleneck profit Product K has a unit...Ch. 24 - Differential analysis for a lease or sell decision...Ch. 24 - Differential analysis for a lease or buy decision...Ch. 24 - Differential analysis for a discontinued product A...Ch. 24 - Differential analysis for a discontinued product...Ch. 24 - Segment analysis for a service company Charles...Ch. 24 - Decision to discontinue a product On the basis of...Ch. 24 - Make-or-buy decision Jupiter Computer Company has...Ch. 24 - Make-or-buy decision for a service company The...Ch. 24 - Machine replacement decision A company is...Ch. 24 - Differential analysis for machine replacement Kim...Ch. 24 - Sell or process further Portland Lumber Company...Ch. 24 - Sell or process further Rise N Shine Coffee...Ch. 24 - Decision on accepting additional business...Ch. 24 - Accepting business at a special price Portable...Ch. 24 - Decision on accepting additional business...Ch. 24 - Service yield pricing and differential analysis...Ch. 24 - Product cost method of product pricing La Femme...Ch. 24 - Product cost method of product costing Smart...Ch. 24 - Target costing Toyota Motor Corporation uses...Ch. 24 - Target costing Instant Image Inc. manufactures...Ch. 24 - Product decisions under bottlenecked operations...Ch. 24 - Product decisions under bottlenecked operations...Ch. 24 - Appendix Total cost method of product pricing...Ch. 24 - Appendix Variable cost method of product pricing...Ch. 24 - Differential analysis involving opportunity costs...Ch. 24 - Differential analysis for machine replacement...Ch. 24 - Differential analysis for sales promotion proposal...Ch. 24 - Differential analysis for further processing The...Ch. 24 - Product pricing using the cost-plus approach...Ch. 24 - Product pricing and profit analysis with...Ch. 24 - Differential analysis involving opportunity costs...Ch. 24 - Differential analysis for machine replacement...Ch. 24 - Differential analysis for sales promotion proposal...Ch. 24 - Differential analysis for further processing The...Ch. 24 - Appendix Product pricing using the cost-plus...Ch. 24 - Product pricing and profit analysis with...Ch. 24 - Ethics in Action Aaron McKinney is a cost...Ch. 24 - Decision on accepting additional business A...Ch. 24 - Accept business at a special price for a service...Ch. 24 - Communication The following conversation took...

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