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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Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:
Direct materials \(17,510
Direct labor 2,600
Variable overhead 2,060
Fixed overhead 7,000
Total manufacturing costs for 2,000 bindings \)29,170
Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.
Requirements
1. Cold Sports’s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.
2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sports’s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.
Sea Blue manufactures flotation vests in Charleston, South Carolina. Sea Blue’s contribution margin income statement for the month ended December 31, 2018, contains the following data:
SEA BLUE
Income Statement
For the Month Ended December 31, 2018
Sales in units 32,000
Net Sales Revenue \(608,000
Variable Costs:
Manufacturing 96,000
Selling and Administrative 108,000
Total Variable Costs 204,000
Contribution Margin 404,000
Fixed Costs:
Manufacturing 124,000
Selling and Administrative 94,000
Total Fixed Costs 218,000
Operating Income \)186,000
Suppose Overboard wishes to buy 4,600 vests from Sea Blue. Sea Blue will not incur any variable selling and administrative expenses on the special order. The Sea Blue plant has enough unused capacity to manufacture the additional vests. Overboard has offered \(15 per vest, which is below the normal sales price of \)19.
Requirements
1. Identify each cost in the income statement as either relevant or irrelevant to Sea Blue’s decision.
2. Prepare a differential analysis to determine whether Sea Blue should accept this special sales order.
3. Identify long-term factors Sea Blue should consider in deciding whether to accept the special sales order.
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 company’s \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)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?
When is nonfinancial information relevant?
What questions should managers answer when setting regular prices?
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