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 ÷ 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 ................................................................................
Variable manufacturing overhead ............................................
Fixed manufacturing overhead
($300,000/30,000) ...................................................................
Variable selling and administrative expenses .........................
Fixed 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 ................................................................................
Variable manufacturing overhead ............................................
Fixed manufacturing overhead
($3,000,000/500,000) ..............................................................
Variable selling and administrative expenses .........................
Fixed 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