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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

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 Sportsโ€™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 Sportsโ€™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 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.

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 companyโ€™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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