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Eldenburg & Wolcott’s Cost Management, 1e Slide # 6
Q2: Target Costing ExampleTed’s Trailers is considering the design, production, and distribution of a new motorcycle trailer. The selling price of similar trailers is $1,200. Ted believes he can sell 10,000 trailers at this price, and he demands a margin of 25% of selling price on all products. Compute the target cost of the trailers.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 7
Q2: Target Costing ExampleThe estimated production costs for the new trailer are shown below. Discuss the types of issues that Ted should investigate as he seeks to reduce these estimated costs to meet the target cost.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 9
Q4: Life Cycle Costing
• Life cycle costing takes the product’s selling prices and costs over its entire life cycle into consideration.
• It is useful in industries with products that are expected to produce losses when first introduced, but rapid technological changes and increased volume are expected in future years.
• Initial production and process design costs will be viewed as costs to be matched against the revenues generated over the product’s entire life.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 11
Q6: Market-Based Pricing
• A product’s selling price depends on the degree of competition and the degree to which the company’s product is differentiated from competitor’s products.
• Market-based prices are based on customer demand for the product.
• The sensitivity of customer demand to changes in the selling price is called the price elasticity of demand.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 12
Q6: Market-Based Pricing
• An increase in selling price should decrease customer demand for the product so that fewer units are sold.• When the decrease in units sales offsets the
increased selling price, the price increase causes total revenue to decrease. This is known as elastic demand.
• When the decrease in units sales does not offset the increased selling price, the price increase causes total revenue to increase. This is known as inelastic demand.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 15
Q6: Market-Based Pricing ExampleTed’s Trailers sells horse trailers in a competitive market. The variable costs of producing the one-horse trailer are $850 per unit. Information from prior years’ indicates that a 10% increase in the trailer’s selling price results in a 15% decrease in customer demand. Calculate the price elasticity of demand and the profit-maximizing price for the one-horse trailer.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 18
Q8: Other Factors that Affect Pricing
• In peak-load pricing, companies charge higher prices when they are at higher capacities.
• When companies set high prices for newly-introduced products, and gradually lower prices to entice customers who would not have purchased at the higher price, this is known as price skimming.
• When prices are set unusually high to take advantage of specific situations, this is known as price gouging.
Eldenburg & Wolcott’s Cost Management, 1e Slide # 20
Q8: Other Factors that Affect Pricing
• When for-profit companies charge different prices to different customers and it is not based on differential costs, this is illegal and is known as price discrimination.• Not-for-profit companies can legally charge
different prices to customers based on their ability to pay.
• Collusive pricing, where competitors get together to determine prices, is not legal.
• Foreign-based companies selling products at prices lower than in the home country is known as dumping.