Chapter 25: Q25-10RQ (page 1406)
What is target pricing? Who uses it?
Answer
Target pricing is a technique or process that a business uses to compute the price of a new product based onmarket prices.
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What is a constraint?
What makes information relevant to decision making?
When is nonfinancial information relevant?
Thomas Company makes a product that regularly sells for \(12.50 per unit. The product has variable manufacturing costs of \)8.50 per unit and fixed manufacturing costs of \(2.00 per unit (based on \)200,000 total fixed costs at current production of 100,000 units). Therefore, the total production cost is \(10.50 per unit. Thomas Company receives an offer from Wesley Company to purchase 5,000 units for \)9.00 each. Selling and administrative costs and future sales will not be affected by the sale, and Thomas does not expect any additional fixed costs.
1. If Thomas Company has excess capacity, should it accept the offer from Wesley? Show your calculations.
2. Does your answer change if Thomas Company is operating at capacity? Why or why not?
What is cost-plus pricing? Who uses it?
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