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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 be right at $1,250. Boy, I was really worried for a minute there. I knew something wasn't right.

Write a1 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

To Prepare: A memo regarding pricing of new computer and target costing.

Explanation

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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