# EXERCISE 8-1 (a) The target cost formula is: Target cost = Market

```EXERCISE 8-1
(a)
The target cost formula is: Target cost = Market price – Desired profit.
In this case, the market price is \$20 and the desired profit is \$6
(30% X \$20). Therefore the target cost is \$14 (\$20 – \$6).
(b)
Target costing is particularly helpful when a company faces a competitive
market. In this case, the price is affected by supply and demand, so no
company in the industry can affect price. Therefore to earn a profit,
companies must focus on controlling costs.
EXERCISE 8-2
The following formula may be used to determine return on investment
Investment
\$8,000,000
X
X
ROI percentage = Return on investment
20%
=
\$1,600,000
Return on investment per unit is then \$16 (\$1,600,000 &divide; 100,000)
The target cost is therefore \$74 computed as follows:
Target cost = Market price – Desired profit
\$74
=
\$90
–
\$16
EXERCISE 8-3
(a)
(1) In this case the selling price would be \$120 (\$100 + [\$100 X 20%]). The
problem with the \$120 is that it is unlikely that Hannon will be able to sell
any All-Body suits at that price. Market research seems to indicate that it
will sell for only \$100. (2) One way that Hannon might consider
manufacturing the All-Body swimsuit is if it has excess capacity and
therefore manufacturing the All-Body will not affect fixed costs. Thus if the
company can cover its variable costs, it might want to sell at the \$100 level.
(b)
In this case, the amount would be the selling price of \$100.
EXERCISE 8-3 (Continued)
(c)
The highest acceptable cost would be the target cost. The target cost is \$80
as shown below:
Target cost = Market price – Desired profit
\$80
=
\$100
–
\$20
EXERCISE 8-4
(a) Total cost per unit:
Direct materials .........................................................................
Direct labor ................................................................................
(\$300,000/30,000) ...................................................................
Variable selling and administrative expenses .........................
(\$150,000/30,000) ...................................................................
Per Unit
\$17
8
11
10
4
5
\$55
(b) Target selling price = \$55 + (40% X \$55) = \$77
EXERCISE 8-5
(a) Total cost per unit:
Direct materials .........................................................................
Direct labor ................................................................................
(\$3,000,000/500,000) ..............................................................
Variable selling and administrative expenses .........................
(\$1,500,000/500,000) ..............................................................
(b) Desired ROI per unit = (25% X \$26,000,000)/500,000 = \$13
Per Unit
\$ 7
9
15
6
14
3
\$54
EXERCISE 8-5 (Continued)
(c) Markup percentage using total cost per unit:
\$13
\$54
= 24.07%
(d) Target selling price = \$54 + (\$54 X 24.07%) = \$67
```