Question

1. For many years, Leno Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 25 percent of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing.

An example of Leno’s problem is typified by item no. 8976, which has the following unit-cost characteristics:

Direct material	$	100
Direct labor		230
Manufacturing overhead		150
Selling and administrative expenses		80

The going market price for an identical product of comparable quality is $610, which is significantly below what Leno is charging.

-What is Leno’s current selling price of item no. 8976?

-If Leno used target costing for item no. 8976, what must happen to costs if the company desires to meet the market price and maintain its current rate of profit on sales? By how much?

-Suppose that by previous cost-cutting drives, costs had already been “pared to the bone” on item no. 8976. What might Leno be forced to do with its markup on cost to remain competitive? By how much?

-iTRUE OR FALSE) in many industries, prices are the result of an interaction between market forces and costs.

2. The following data pertain to Lawn Master Corporation’s top-of-the-line lawn mower.

Variable manufacturing cost	$	317
Applied fixed manufacturing cost		41
Variable selling and administrative cost		62
Allocated fixed selling and administrative cost		?

To achieve a target price of $516 per lawn mower, the markup percentage is 12.1 percent on total unit cost.

Required:

1. What is the fixed selling and administrative cost allocated to each unit of Lawn Master’s top-of-the-line mower? (Do not round your intermediate computations. Round your final answer to the nearest dollar amount.)
2. For each of the following cost bases, develop a cost-plus pricing formula that will result in a target price of $516 per mower: (Round your percentage answers to 2 decimal places (i.e., .1234 should be entered as 12.34).)

	Cost-Plus Pricing Formula (a) Variable manufacturing cost $516 = + ( % × ) (b) Absorption manufacturing cost $516 = + ( % × ) (c) Total variable cost $516 = + ( % × )

Answer 1

Answer: Leno’s current selling price of item no. 8976

Particulars                                                                              Amount($)

Direct material                                                                                    100

Direct labour                                                                           230

Prime Cost                                                                             330

Manufacturing overhead                                                        150

Cost of Production                                                               480

Selling and administrative expenses                                      80

Cost of Sales                                                                         560

+Profit                                                                                     140

Selling Price                                                                          700

If Leno used target costing for item no. 8976, what must happen to costs if the company desires to meet the market price and maintain its current rate of profit on sales? By how much?

Selling Price =$ 610

Profit = ¼ on Cost = 1/5 on Selling Price

Profit = 610 * 1/5 = $122

So, Cost Price = 610 -122 = $488

So, cost price to be reduced by = 560 – 488 = $72

Suppose that by previous cost-cutting drives, costs had already been “pared to the bone” on item no. 8976. What might Leno be forced to do with its markup on cost to remain competitive? By how much?

Then Profit = 610 – 560 = $ 50

So Profit on cost = 50 / 560 =8.93%

So, profit markup to be reduced by 16.07%.

(TRUE OR FALSE) in many industries, prices are the result of an interaction between market forces and costs.

True.

What is the fixed selling and administrative cost allocated to each unit of Lawn Master’s top-of-the-line mower? (Do not round your intermediate computations. Round your final answer to the nearest dollar amount.)

Particulars                                                                              Amount($)

Variable manufacturing cost                                                   317

Applied fixed manufacturing cost                                           41

Variable selling and administrative cost                                  62

Allocated fixed selling and administrative cost (B.F.)             167

Total Cost       (516 / 112.1%)                                               460

Profit                                                                                       56

Selling Price                                                                          516

For each of the following cost bases, develop a cost-plus pricing formula that will result in a target price of $516 per mower: (Round your percentage answers to 2 decimal places (i.e., .1234 should be entered as 12.34).)

	Cost-Plus Pricing Formula (a) Variable manufacturing cost $516     = 317 + 62.78% or 317 (1.6278) (b) Absorption manufacturing cost $516     = 41 + 1158.54% or 41 (12.5854) (c) Total variable cost $516     = 379 + 36.15% or 379 (1.3615)