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15-20
PROBLEM 15-38 (CONTINUED)
3. The break-even price is $56,667, computed as follows:
4. Profits will probably decline. Heartland originally used a full-cost pricing formula to
derive the $82,500 bid price. A drop in the selling price to $63,500 signifies that the
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
15-21
PROBLEM 15-39 (30 MINUTES)
1. (a) Time charges:
Hourly labor cost +
hourslabor annual
storage) and handling material
(excluding overhead annual
+
magin profit cover
tocharge hourly
(b) Material charges:
+ used materials of cost annual
costs storage and handling lmateria
job on incurred
cost material
job on incurred
cost Material
2. PRICE QUOTATION
Time charges:
Labor time ................................................................
400
hours
Rate ................................................................
$36.25
per hour
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
15-22
PROBLEM 15-39 (CONTINUED)
3.
Price of job without markup on material costs (from requirement 2) ....
$ 97,000
PROBLEM 15-40 (25 MINUTES)
1. Direct-labor hours (DLH) required for job =
doses/DLH 2,000
packaged be todoses 1,000,000
Traceable out-of-pocket costs:
Direct labor ($16.00 500) ....................................................................
$ 8,000
2. As in requirement (1), 500 direct-labor hours are required for the job.
Direct labor ($16.00 500) ........................................................................
$ 8,000
15-23
PROBLEM 15-40 (CONTINUED)
3. Under the supposition that the price computed by Manhattan Pharmaceuticals, Inc.
PROBLEM 15-41 (25 MINUTES)
1. The manufacturing overhead rate is $27.00 per direct-labor hour, and the product
2. The analysis of accepting the Glasgow Industries’ order of 120,000 units is as
follows:
Per Unit
Totals for
120,000 Units
Incremental revenue ...............................................................
$28.50
$3,420,000
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
15-24
PROBLEM 15-41 (CONTINUED)
3. The minimum unit price that Wolverine Valve and Fitting Company could accept
without reducing net income must cover the variable unit cost plus the additional
fixed costs.
4. Wolverine’s management should consider the following factors before accepting the
Glasgow Industries order:
• The effect of the special order on Wolverine’s sales at regular prices.
15-25
PROBLEM 15-42 (30 MINUTES)
1. Cost-plus pricing begins by computing an item’s cost and then adds an appropriate
markup. The result is the item’s selling price. In contrast, target costing begins by
2. The current selling price is $675:
Direct material……………………………...
$ 90
3. Lehigh’s markup is $135, which is 20% of the current $675 selling price ($135 ÷
$675). To achieve a 20% markup on a $585 selling price, the company must reduce
its costs by $72.
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
PROBLEM 15-42 (CONTINUED)
4. Yes. The company should focus its efforts on trimming non-value-added costs.
5. If costs cannot be reduced below $540, Lehigh will have to reduce its markup to
6. The statement means that selling prices are a function of market conditions;
15-27
PROBLEM 15-43 (30 MINUTES)
1. The minimum price per blanket that Detroit Synthetic Fibers, Inc. could bid without
reducing the company’s net income is $48 calculated as follows:
2. Using the full cost criteria and the maximum allowable return specified, Detroit
Synthetic Fibers, Inc.’s bid price per blanket would be $59.80 calculated as follows:
Relevant costs from requirement (1) ........................................................
$48.00
3. Factors that management should consider before deciding whether to submit a bid
at the maximum acceptable price of $50 per blanket include the following:
15-28
PROBLEM 15-44 (25 MINUTES)
1. Target costing is more appropriate. MSC is limited in terms of what price it can
charge due to market conditions. A cost-plus-markup approach will use the desired
2. Target profit = asset investment x rate of return
= $27,000,000 x 12%
4. Target profit = asset investment x rate of return
= $27,000,000 x 14%
5. To achieve a 14% return and a $265 revenue-per-hour figure, the company must trim
15-29
PROBLEM 15-45 (40 MINUTES)
1.
Target costing is the design of a product, and the processes used to produce it, so
that ultimately the product can be manufactured at a cost that will enable a firm to
2.
Value engineering (or value analysis) refers to a cost-reduction and process
improvement technique that utilizes information collected about a product's design
PROBLEM 15-45 (CONTINUED)
4.
The proposed changes to the just-in-time cell manufacturing process at Portland
Electronics will bring costs down to $532 per unit, which is below the $540 target cost
limit. Revised costs under the JIT cell manufacturing process are calculated as follows:
Current
Increase/
(Decrease)
Revised
Material:
Purchased components ..................................
$215
$215
All other ............................................................
85
85
Labor:
15-31
PROBLEM 15-46 (50 MINUTES)
1. Budgeted overhead costs:
Department I
Department II
Variable overhead
Department I: 37,500 $12 ................................................................
$450,000
2.
Standard
Deluxe
Total cost ................................................................................................
$600.00
$750.00
Markup (15% of cost)
3.
Department I
Department II
Budgeted overhead (from requirement 1) ................................
$675,000
$450,000
15-32
PROBLEM 15-46 (CONTINUED)
4.
Standard
Deluxe
Direct material ............................................................................................
$240
$390
Direct labor ................................................................................................
210
210
Manufacturing overhead:
5.
Standard
Deluxe
Total cost (from requirement 4) ................................................................
$582.00
$768.00
Markup (15% of cost)
6. The management of Super Sounds, Inc. should use departmental overhead rates. The
overhead cost structures in the two production departments are quite different, and
15-33
PROBLEM 15-47 (35 MINUTES)
1. Target costing is market driven, beginning with a determination of the selling price
2. Add cabinet doors: [(10 x 1) + (20 x 2) + (30 x 3) + (60 x 4) + (80 x 5)] = 780; 780 ÷ 200
= 3.900
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
15-34
PROBLEM 15-47 (CONTINUED)
Ranking (from strongest to weakest):
3. (a) Danish Interiors currently earns a $48 profit on each table sold ($240 - $192),
(b) Customers feel most strongly about adding cabinet doors and giving the
table top a new appearance. Both of these features can be added, and Danish
Interiors will be able to earn its 20% markup. The third and fifth most
desirable features (the expanded storage area and extended warranty) are too
costly. If it desires, management could also add a lock to the storage area.
Supporting calculations follow.
4. An expanded storage area would be the most logical additional feature in view of its
no. 3 ranking. Danish Interiors might use value engineering to study the design and
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
15-35
SOLUTIONS TO CASES
CASE 15-48 (40 MINUTES)
1. Bid based on standard pricing policy:
Direct material ...........................................................................................
$307,200
2. Minimum bid acceptable to Bair Company:
Direct material ...........................................................................................
$307,200
aProportion of variable overhead =
overhead total budgeted
overhead variablebudgeted
Chapter 15 - Target Costing and Cost Analysis for Pricing Decisions
15-36
CASE 15-48 (CONTINUED)
bSelling price per unit of standard product ................................
$14,400
Variable costs per unit
3. Lyan Company’s assistant purchasing manager is not acting ethically. The details of
the bid submitted by Bair Company are confidential between Bair Company and Lyan
15-37
CASE 15-49 (50 MINUTES)
1. Handy Household Products, Inc. should price the standard compound at $44 per
case and the commercial compound at $60 per case. The contribution margin is the
highest at these prices as shown in the following calculations:
Standard Compound
Selling price per case ................................................................
$ 38
$ 40
$ 42
$ 44
$ 46
Commercial Compound
Selling price per case ................................................................
$ 52
$ 54
$ 60
$ 64
$ 70
15-38
CASE 15-49 (CONTINUED)
2. a. Management should continue to operate during the final six months of the
current year because any shutdown would be temporary. The company intends
to remain in the business and expects a profitable operation during the next year.
This is a short-run decision problem. Therefore, the fixed costs are irrelevant to
the decision, because they cannot be avoided in the short run. The products do
have a positive contribution margin so operations should continue.
HANDY HOUSEHOLD PRODUCTS, INC.
SHREVEPORT PLANT
PROJECTED CONTRIBUTION MARGIN
FOR THE SIX-MONTH PERIOD ENDING DECEMBER 31
(IN THOUSANDS)
Standard
Commercial
Total
Sales ................................................................................................
$2,300
$2,450
$4,750
Variable costs:
b. Management should consider the following qualitative factors when making the
decision about the Shreveport Plant.
