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.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Skiable Acres operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 10% return on investment on the companyโs \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)31,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about \(8 per guest. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.
Requirements
1. Would Skiable Acres emphasize target pricing or cost-plus pricing? Why?
2. If other resorts in the area charge \)85 per day, what price should Skiable Acres charge?
Members of the board of directors of Security Check have received the following operating income data for the year ended May 31, 2018:
SECURITY CHECK Income Statement For the Year Ended May 31, 2018 |
Product Line |
Industrial Systems | Household Systems | Total |
Net Sales Revenue | \( 360,000 | \) 380,000 | \( 740,000 |
Cost of Goods Sold: | |||
Variable | 37,000 | 47,000 | 84,000 |
Fixed | 260,000 | 63,000 | 323,000 |
Total Cost of Goods Sold | 297,000 | 110,000 | 407,000 |
Gross Pro๏ฌt | 63,000 | 270,000 | 333,000 |
Selling and Administrative Expenses: | |||
Variable | 64,000 | 73,000 | 137,000 |
Fixed | 44,000 | 26,000 | 70,000 |
Total Selling and Administrative Expenses | 108,000 | 99,000 | 207,000 |
Operating Income (Loss) | \) (45,000) | \( 171,000 | \) 126,000 |
Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by \(80,000 and decrease fixed selling and administrative expenses by \)12,000.
Requirements
1. Prepare a differential analysis to show whether Security Check should drop the industrial systems product line.
2. Prepare contribution margin income statements to show Security Checkโs total operating income under the two alternatives: (a) with the industrial systems line and (b) without the line. Compare the difference between the two alternativesโ income numbers to your answer to Requirement 1.
3. What have you learned from the comparison in Requirement 2?
Mary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associatesโs payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positionsโpayroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system.
Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting:
The current payroll software that was purchased for \(4,000 three years ago would not be needed if payroll processing were outsourced.
Duck Associatesโ bookkeeper would spend half her time preparing the weekly payroll input form that is given to the payroll processing service. She is paid \)450 per week.
Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is \(42,000.
The payroll processing service would charge \)2,000 per month.
Requirements
1. Would outsourcing the payroll function increase or decrease Duck Associatesโ operating income?
2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect of having to lay off Stock, who has become a close personal friend. She does not believe there is another position available for Stock at his current salary. Can you think of other factors that might support keeping Stock, rather than outsourcing payroll processing? How should each of the factors affect Tanโs decision if she wants to do what is best for Duck Associates and act ethically?
Cool Systems manufactures an optical switch that it uses in its final product. The switch has the following manufacturing costs per unit:
Direct materials \(5.00
Direct labor 3.00
Variable overhead 6.00
Fixed overhead 7.00
Manufacturing product cost \)21.00
Another company has offered to sell Cool Systems the switch for $15.00 per unit. If Cool Systems buys the switch from the outside supplier, the idle manufacturing facilities cannot be used for any other purpose, yet none of the fixed costs are avoidable.
Prepare an outsourcing analysis to determine whether Cool Systems should make or buy the switch.
Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acresโs reputation has diminished and other resorts in the vicinity are charging only \(85 per lift ticket. Skiable Acres has become a price-taker and will not be able to charge more than its competitors. At the market price, Skiable Acres managers believe they will still serve 725,000 skiers and snowboarders each season.
Requirements
1. If Skiable Acres cannot reduce its costs, what profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?
2. Assume Skiable Acres has found ways to cut its fixed costs to \)30,000,000. What is its new target variable cost per skier/snowboarder?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
