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

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
BuyFind

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

Solutions

Chapter
Section
Chapter 25, Problem 3TIF
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 a brief memo from Les Miles to Juanita Jackson (a) responding to her solution to the pricing problem, and (b) explaining how target costing could be used to solve the problem.

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Chapter 25 Solutions

Financial And Managerial Accounting
Ch. 25 - Lease or sell Plymouth Company owns equipment with...Ch. 25 - Discontinue a segment Product Tango has revenue of...Ch. 25 - Make or buy A company manufactures various-sized...Ch. 25 - Replace equipment A machine with a book value of...Ch. 25 - Process or sell Product J19 is produced for 11 per...Ch. 25 - Accept business at special price Product A is...Ch. 25 - Product cost markup percentage Green Thumb Garden...Ch. 25 - Bottleneck profit Product K has a unit...Ch. 25 - Differential analysis for a lease or sell decision...Ch. 25 - Differential analysis for a lease or buy decision...Ch. 25 - Differential analysis for a discontinued product A...Ch. 25 - Differential analysis for a discontinued product...Ch. 25 - Segment analysis for a service company Charles...Ch. 25 - Decision to discontinue a product On the basis of...Ch. 25 - Make-or-buy decision Somerset Computer Company has...Ch. 25 - Make-or-buy decision for a service company The...Ch. 25 - Machine replacement decision A company is...Ch. 25 - Differential analysis for machine replacement...Ch. 25 - Sell or process further Calgary Lumber Company...Ch. 25 - Sell or process further Dakota Coffee Company...Ch. 25 - Decision on accepting additional business...Ch. 25 - Accepting business at a special price Box Elder...Ch. 25 - Decision on accepting additional business...Ch. 25 - Product cost method of product pricing La Femme...Ch. 25 - Product cost method of product costing Smart...Ch. 25 - Target costing Toyota Motor Corporation (TM) uses...Ch. 25 - Target costing Instant Image Inc. manufactures...Ch. 25 - Product decisions under bottlenecked operations...Ch. 25 - Product decisions under bottlenecked operations...Ch. 25 - Total cost method of product pricing Based on the...Ch. 25 - Variable cost method of product pricing Based on...Ch. 25 - Differential analysis involving opportunity costs...Ch. 25 - Differential analysis for machine replacement...Ch. 25 - Differential analysis for sales promotion proposal...Ch. 25 - Differential analysis for further processing The...Ch. 25 - Product pricing and profit analysis with...Ch. 25 - Product pricing using the cost-plus approach...Ch. 25 - Differential analysis involving opportunity costs...Ch. 25 - Differential analysis for machine replacement...Ch. 25 - Differential analysis for sales promotion proposal...Ch. 25 - Differential analysis for further processing The...Ch. 25 - Product pricing and profit analysis with...Ch. 25 - Product pricing using the cost-plus approach...Ch. 25 - Analyze Pacific Airways Pacific Airways provides...Ch. 25 - Service yield pricing and differential equations...Ch. 25 - Service yield pricing Valley Power Company uses...Ch. 25 - Service yield pricing and differential analysis...Ch. 25 - Aaron McKinney is a cost accountant for Majik...Ch. 25 - Communication The following conversation took...Ch. 25 - Decision on accepting additional business A...Ch. 25 - Accepting service business at a special price If...Ch. 25 - Identifying product cost distortion Peachtree...Ch. 25 - In differential cost analysis, which one of the...Ch. 25 - Johnson Company manufactures a variety of shoes...Ch. 25 - Aril Industries is a multiproduct company that...Ch. 25 - Oakes Inc. manufactured 40,000 gallons of Mononate...

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