A company uses a target pricing and costing approach. The following is its costs and revenues for the current year:The company intends to increase unit sales to 120,000 in the next year by reducing the unit price to US $8. If the company is to achieve a unit target operating income of 15%, by what amount must it reduce the full cost per unit?
Answer(s): D
Unit target operating income is US $1.20 15% $8 target price). Thus, the unit target full cost is US $6.80 $8 - $1.20). The current full cost per unit is US $8.50 [$515,000 cost of goods sold + $335,000 operating costs excluding production) - 100,00 units sold], so the necessary reduction in full cost per unit is US $1.70 $8.50 - $6.80).
A situation in which companies conspire to restrict output and set artificially high prices is known as:
Answer(s): A
Collusive pricing is illegal. It involves two or more competitors conspiring to restrict output and charge artificially high prices.
A pricing strategy that sells combinations of products at a price lower than the combined prices of the individual items is:
Answer(s): C
Product-bundle pricing is a strategy to promote items consumers might not otherwise buy by selling combinations of products at a price lower than the prices of the individual items combined.
Which of the following statements is true with respect to value engineering?I). Value engineering is a means of reaching targeted cost levels.II). Value engineering is the Japanese concept that emphasizes continuous improvement in all phases of company activities through numerous minor changes.III). Value engineering requires distinguishing between cost incurrence and locked-in costs, with an emphasis on controlling costs at the design stage.
Answer(s): B
Value engineering is a means of reaching targeted cost levels. Value engineering requires distinguishing between cost incurrence and locked-i n costs, with emphasis on controlling costs at the design stage. It is not Japanese.
Company F applies a target pricing and costing approach. The following information about costs and revenues of Company F's product are available for the year just ended:Company F plans to increase unit sales to 80,000 by reducing the product's unit price to US $320. If Company F desires a unit target operating income of 12%, by what amount must it reduce the full cost per unit?
Unit target operating income is US $38.40 12% > $320 unit target price). Hence, the unit target full cost is US $281.60 $320 - $38.40). The current full cost per unit is US $352.00 [($13,200,000 CGS + $7,920,000 other value chain operating costs) - 60,000 units sold], so the necessary reduction in the full cost per unit is US $70.40 $352.00 - $281.60).
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