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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 are joint costs? How do they affect the sell or process further decision?

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.

Brinn, located in Port St. Lucie, Florida, produces two lines of electric toothbrushes: deluxe and standard. Because Brinn can sell all the toothbrushes it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data:

Per Unit

Deluxe Toothbrush Standard Toothbrush

Sales price \(86 \)56

Variable costs 20 18

Contribution margin \(66 \)38

Contribution margin ratio 76.7% 67.9%

After expansion, the factory will have a production capacity of 4,100 machine hours per month. The plant can manufacture either 50 standard electric toothbrushes or 35 deluxe electric toothbrushes per machine hour.

Requirements

1. Identify the constraining factor for Brinn.

2. Prepare an analysis to show which product line to emphasize.

Explain the difference between price-takers and price-setters.

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?

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