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What is target pricing? Who uses it?

Short Answer

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Answer

Target pricing is a technique or process that a business uses to compute the price of a new product based onmarket prices.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Price

Price refers to theexchange cost set for a product or service. Price consists ofvarious costsincurred by an entity to make a product and its standard profit margin.

02

Meaning and usage of target pricing

Target pricing refers to the process under which a business concern estimates the price of a product according to the competition in the market and simultaneously applies the standard profit margin to that price to achieve themaximum cost for the new product.

Selling and administration departments use target pricing.

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Most popular questions from this chapter

What is the most common constraint faced by merchandisers?

What questions should managers answer when facing constraints?

What is differential analysis?

Tread Light produces two types of exercise treadmills: regular and deluxe. The exercise craze is such that Tread Light could use all its available machine hours to produce either model. The two models are processed through the same production departments. Data for both models are as follows:

Per Unit

Deluxe Regular

Sales price \(1,030 \)610

Costs:

Direct materials 320 130

Direct labor 88 180

Variable manufacturing overhead 270 90

Fixed manufacturing overhead* 102 34

Variable operating expenses 121 63

Total costs 901 497

Operating income \(129 \)113

*allocated on the basis of machine hours

Requirements

1. What is the constraint?

2. Which model should Tread Light produce? (Hint: Use the allocation of fixed manufacturing overhead to determine the proportion of machine hours used by each product.)

3. If Tread Light should produce both models, compute the mix that will maximize operating income.

Priscilla Smiley manages a fleet of 250 delivery trucks for Daniels Corporation. Smiley must decide whether the company should outsource the fleet management function. If she outsources to Fleet Management Services (FMS), FMS will be responsible for maintenance and scheduling activities. This alternative would require Smiley to lay off her five employees. However, her own job would be secure; she would be Danielsโ€™s liaison with FMS. If she continues to manage the fleet, she will need fleet management software that costs \(9,500 per year to lease. FMS offers to manage this fleet for an annual fee of \)300,000. Smiley performed the following analysis:

Retain in-house Outsource to FMS Difference

Annual leasing fee for \(9,500 \)9,500

Software

Annual maintenance of

Trucks 147,000 147,000

Total annual salaries of

Five laid-off employees 185,000 185,000

Fleet management

Serviceโ€™s annual fee \(300,000 (300,000)

Total differential cost of

Outsourcing \)341,500 \(300,000 \)41,500

Requirements

1. Which alternative will maximize Danielsโ€™s short-term operating income?

2. What qualitative factors should Daniels consider before making a final decision?

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