Chapter 15 – Target Costing and Cost Analysis for Pricing Decisions
47. Collins Company uses cost-plus pricing and has calculated total variable manufacturing
cost, total absorption manufacturing cost, and total cost for one of its products. Which of these
costs would be the smallest?
48. Which of the following formulas represents the markup percentage on total cost?
49. When determining the markup to be used in a cost-plus pricing formula, many companies
base the markup on a target:
50. The following costs relate to Tower Company: Variable manufacturing cost, $30; variable
selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated
fixed selling and administrative cost, $4. If Tower uses absorption manufacturing-cost pricing
formulas, the company’s markup percentage would be computed on the basis of:
51. The following costs relate to Tower Company: Variable manufacturing cost, $30; variable
selling and administrative cost, $8; applied fixed manufacturing overhead, $15; and allocated
fixed selling and administrative cost, $4. If Tower uses total-cost pricing formulas, the
company’s markup percentage would be computed on the basis of:
52. The following data pertain to Laramie Enterprises:
Variable manufacturing cost
$60
Variable selling and administrative cost
10
Applied fixed manufacturing cost
30
Allocated fixed selling and administrative cost
5
What price will the company charge if the firm uses cost-plus pricing based on total cost and a
markup percentage of 60%?
53. The following data pertain to Ronaldo Enterprises:
Variable manufacturing cost
$70
Variable selling and administrative cost
20
Applied fixed manufacturing cost
40
Allocated fixed selling and administrative cost
15
What price will the company charge if the firm uses cost-plus pricing based on absorption
manufacturing cost and a markup percentage of 110%?
54. The following data pertain to Frontier Enterprises:
Variable manufacturing cost
$70
Variable selling and administrative cost
20
Applied fixed manufacturing cost
40
Allocated fixed selling and administrative cost
15
What price will the company charge if the firm uses cost-plus pricing based on variable
manufacturing cost and a markup percentage of 110%?
Chapter 15 – Target Costing and Cost Analysis for Pricing Decisions
Use the following information to answer Questions 55-58.
The Pines Company, which manufactures office equipment, is ready to introduce a new line
of portable copiers. The following copier data are available:
Variable manufacturing cost
$180
Variable selling and administrative cost
90
Applied fixed manufacturing cost
60
Allocated fixed selling and administrative cost
75
55. What price will the company charge if the firm uses cost-plus pricing based on variable
manufacturing cost and a markup percentage of 220%?
56. What price will the company charge if the firm uses cost-plus pricing based on total
manufacturing cost and a markup percentage of 160%?
57. What price will the company charge if the firm uses cost-plus pricing based on total
variable cost and a markup percentage of 120%?
58. What price will the company charge if the firm uses cost-plus pricing based on total cost
and a markup percentage of 40%?
59. Musik Corporation uses a 140% markup on total cost and recently computed a selling
price of $1,560 for a particular product. On the basis of this information, the product’s total
cost is:
60. Fantasy Transport Company has average invested capital of $800,000 and a target return
on investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units.
Fantasy’s markup percentage on total cost is:
61. If the target profit is $60,000 for a volume of 480 units, fixed costs are $168,000, and the
variable cost per unit is $450, then the markup percentage on variable cost would be:
Chapter 15 – Target Costing and Cost Analysis for Pricing Decisions
Use the following information to answer Questions 62 – 64.
Longwood, Inc. manufactures various lines of computer equipment and is planning to
introduce a new line of laptops. Current plans call for the production and sale of 1,000 units,
with estimated costs as follows:
Variable costs:
Manufacturing
$450,000
Selling and Administrative
100,000
Total variable costs
$550,000
Fixed costs:
Manufacturing
$300,000
Selling and Administrative
180,000
Total fixed costs
480,000
Total costs
$1,030,000
The average amount of capital invested in the laptop product line is $900,000 and
Longwood’s target return on investment is 18%.
62. What price must Longwood charge if the company uses cost-plus pricing based on total
cost?
63. If Longwood uses cost-plus pricing based on absorption cost, the markup percentage the
company must use would be:
64. What price must Longwood charge if the company uses cost-plus pricing based on total
variable cost?
65. Which of the following terms describes a pricing strategy in which a new product’s initial
price is set high and then eventually lowered to appeal to a broader range of customers?
66. What is price skimming?
67. Which of the following terms describes a pricing strategy in which a new product’s initial
price is set relatively low in order to gain a large market share?
68. Company A uses a pricing approach where the initial price for a product is set high and
then lowered, and Company B uses an approach where initial prices are set low in an effort to
gain market share. What terms best describe these practices?
69. Charlene Company, which desires to enter the market with a new product, will perform
the following tasks:
1—Design and engineer the product.
2—Determine the product’s cost.
3—Determine the desired profit margin.
4—Determine the suggested selling price.
If Charlene uses target costing, which task would the company perform first?
70. The four tasks that follow take place with the concept known as target costing:
1—Value engineering.
2—Establish a target selling price.
3—Establish a target cost.
4—Establish a target profit.
Which of the following choices depicts the correct sequence of these tasks?
71. Charter Corporation manufactures a single product that has a cost of $350. The company
uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that
virtually always exceeds that of the market leaders. If Charter changes to the approach known
as target costing, the company will first:
72. Which of the following features is typically absent in target costing?
73. Which of the following is (are) a key feature of target costing?
74. Flagler Electronics currently sells a camera for $240. An aggressive competitor has
announced plans for a similar product that will be sold for $205. Flagler’s marketing
department believes that if the price is dropped to meet competition, unit sales will increase
by 10%. The current cost to manufacture and distribute the camera is $175, and Flagler has a
profit goal of 20% of sales. If Flagler meets competitive selling prices, what is the company’s
target cost?
75. Miami Industries currently sells an industrial mixer for $900 that market leaders sell for
$820. The current costs to manufacture and distribute the mixer total $645, and the company
has a profit goal of 30% of sales. Miami uses target costing in its efforts to be a leader in the
marketplace. On the basis of this information, (1) what should Miami consider to be the initial
driver of the target-costing process and (2) what amount of cost reduction is needed for the
company to achieve its goals?
Initial Driver
Cost Reduction
Current price of $900
Current price of $900
Some other amount
76. Rudy Enterprises currently sells a piece of luggage for $200. An aggressive competitor
has announced plans for a similar product that will be sold for $170. Rudy’s marketing
department believes that if the price is dropped to meet competition, unit sales will increase
by 10%. The current cost to manufacture and distribute the luggage is $130, and Rudy has a
profit goal of 30% of sales. If Rudy meets competitive selling prices, what must happen to the
company’s manufacturing and distribution cost?
77. Delmar Enterprises produces bicycles in a highly competitive market. During the past
year, the company has added a 30% markup on the $250 manufacturing cost for one of its
most popular models. A new competitor manufactures a similar model, has established a $300
selling price, and is seriously eroding Delmar’s market share. Management now desires to use
a target-costing approach to remain competitive and is willing to accept a 20% return on sales.
If target costing is used, which of the following choices correctly denotes (1) the price that
Delmar will charge and (2) company’s target cost?
Selling Price
Target Cost
78. Consider the following statements about activity-based costing and its use in pricing:
I. A company that uses target costing generally would have little need for activity-based
costing.
II. Companies that use cost-plus pricing methods would have little need for activity-based
costing.
III. The use of activity-based costing will often lead to better pricing decisions by managers.
79. Which of the following management tools is a key component of target costing?