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What is target pricing? Who uses it?

Short Answer

Expert verified

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

Green Thumb operates a commercial plant nursery, where it propagates plants for garden centers throughout the region. Green Thumb has \(5,300,000 in assets. Its yearly fixed costs are \)625,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total \(1.70. Green Thumbโ€™s volume is currently 490,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.00 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.

Requirements

1. Green Thumbโ€™s owners want to earn an 10% return on the companyโ€™s assets. What is Green Thumbโ€™s target full product cost?

2. Given Green Thumbโ€™s current costs, will its owners be able to achieve their target profit?

3. Assume Green Thumb has identified ways to cut its variable costs to \(1.55 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Green Thumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Green Thumb does not expect volume to be affected, but it hopes to gain more control over pricing. If Green Thumb has to spend \)135,000 this year to advertise and its variable costs continue to be $1.55 per unit, what will its cost-plus price be? Do you think Green Thumb will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

You are trying to decide whether to trade in your inkjet printer for a more recent model. Your usage pattern will remain unchanged, but the old and new printers use different ink cartridges.

Indicate if the following items are relevant or irrelevant to your decision:

a. The price of the new printer

b. The price paid for the old printer

c. The trade-in value of the old printer

d. Paper cost

e. The difference between ink cartridgesโ€™ costs

What questions should managers answer when considering dropping a product or segment?

Refer to details about Skiable Acres from Short Exercise S25-2. Assume that Skiable Acresโ€™s 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?

Sea Blue manufactures flotation vests in Charleston, South Carolina. Sea Blueโ€™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 Blueโ€™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.

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