EXERCISE 8-1
(a)
The target cost formula is: Target cost = Market price – Desired profit.
In this case, the market price is $20 and the desired profit is $8
(40% X $20). Therefore the target cost is $12 ($20 – $8).
(b)
Target costing is particularly helpful when a company faces a competitive
market. In this case, the price is affected by supply and demand, so no
company in the industry can affect price. Therefore to earn a profit,
companies must focus on controlling costs.
EXERCISE 8-2
The following formula may be used to determine return on investment
Investment
$8,000,000
X
X
ROI percentage = Return on investment
20%
=
$1,600,000
Return on investment per unit is then $16 ($1,600,000 ÷ 100,000)
The target cost is therefore $74 computed as follows:
Target cost = Market price – Desired profit
$74
=
$90
–
$16
EXERCISE 8-3
(a)
(1) In this case the selling price would be $125 ($100 + [$100 X 25%]). The
problem with the $125 is that it is unlikely that Leno will be able to sell any
All-Body suits at that price. Market research seems to indicate that it will
sell for only $100. (2) One way that Leno might consider manufacturing the
All-Body swimsuit is if it has excess capacity and therefore manufacturing
the All-Body will not affect fixed costs. Thus if the company can cover its
variable costs, it might want to sell at the $100 level.
(b)
In this case, the amount would be the selling price of $100.
EXERCISE 8-3 (Continued)
(c)
The highest acceptable cost would be the target cost. The target cost is $75
as shown below:
Target cost = Market price – Desired profit
$75
=
$100
–
$25
EXERCISE 8-4
(a) Total cost per unit:
Direct materials .........................................................................
Direct labor ................................................................................
Variable manufacturing overhead ............................................
Fixed manufacturing overhead
($300,000/30,000) ...................................................................
Variable selling and administrative expenses .........................
Fixed selling and administrative expenses
($150,000/30,000) ...................................................................
Per Unit
$17
8
11
10
4
5
$55
(b) Target selling price = $55 + (40% X $55) = $77
EXERCISE 8-5
(a) Total cost per unit:
Direct materials .........................................................................
Direct labor ................................................................................
Variable manufacturing overhead ............................................
Fixed manufacturing overhead
($3,000,000/500,000) ..............................................................
Variable selling and administrative expenses .........................
Fixed selling and administrative expenses
($1,500,000/500,000) ..............................................................
(b) Desired ROI per unit = (25% X $28,000,000)/500,000 = $14
Per Unit
$ 7
11
15
6
14
3
$56
EXERCISE 8-5 (Continued)
(c) Markup percentage using total cost per unit:
$14
$56
=
25%
(d) Target selling price = $56 + ($56 X 25%) = $70
EXERCISE 8-6
(a)
Total cost per session:
Direct materials .................................................
Direct labor ........................................................
Variable overhead .............................................
Fixed overhead ($950,000 ÷ 1,000) ...................
Variable selling & administrative expenses ....
Fixed selling & administrative expenses
($500,000 ÷ 1,000) ..........................................
Total cost per session ..............................
Per Session
$ 20
400
50
950
40
500
$1,960
(b)
Desired ROI per session = (20% X $2,352,000) ÷ 1,000 = $470.40
(c)
Mark-up percentage on total cost per session = $470.40 ÷ $1,960 = 24%
(d)
Target price per session = $1,960 + ($1,960 X 24%) = $2,430.40
EXERCISE 8-7
(a) Fixed manufacturing overhead per unit =
$1,500,000
= $500 per unit
3,000
Fixed selling and administrative = $324,000 = $108 per unit
expenses per unit
3,000
(b) Desired ROI per unit =
20% X $54,000,000
= $3,600 per unit
3,000
EXERCISE 8-7 (Continued)
(c)
Direct materials .........................................................................
Direct labor ................................................................................
Variable manufacturing overhead ............................................
Fixed manufacturing overhead ................................................
Variable selling and administrative expenses .........................
Fixed selling and administrative expenses .............................
Total cost per unit .....................................................................
Desired ROI per unit ..................................................................
Target selling price ...................................................................
Per Unit
$ 380
290
72
500
55
108
1,405
3,600
$5,005
EXERCISE 8-8
(a)
Total
Cost
Hourly labor rate for repairs
Technician’s wages and benefits
Overhead costs
Office employee’s salary and
benefits
Other overhead
Total
Per Hour
÷ Hours = Charge
$228,000
÷
7,600
=
$30
38,000
15,200
$281,200
÷
÷
÷
7,600
7,600
7,600
=
=
=
5
2
37
30
$67
Profit margin
Rate charged per hour of labor
(b)
Total
Material
Invoice Cost,
Material
Loading
Parts and
Loading
Charges ÷
Materials = Percentage
Overhead costs
Parts manager’s salary and
benefits
Office employee’s salary
and benefits
Other overhead
Profit margin
Material loading percentage
$42,500
9,000
51,500
24,000
$75,500
÷
÷
÷
$400,000
$400,000
$400,000
=
=
=
12.875%
6.000%
18.875%
20.000%
38.875%
EXERCISE 8-8 (Continued)
(c) Job: Pace Corporation—Rebuild spot welder
Labor charges
40 hours @ $67 ............................................
Material charges
Cost of parts and materials ........................
Material loading charge
(38.875% X $2,000) ...................................
$2,680.00
$2,000.00
777.50
2,777.50
Total price of labor and material ..........
$5,457.50
EXERCISE 8-9
(a)
Total
Cost
Hourly labor rate for repairs
Technician’s wages and benefits
Overhead costs
Office employee’s salary and
benefits
Other overhead
Total
Per Hour
÷ Hours = Charge
$150,000
÷
6,250
=
$24.00
30,000
15,000
$195,000
÷
÷
÷
6,250
6,250
6,250
=
=
=
4.80
2.40
31.20
38.00
$69.20
Profit margin
Rate charged per hour of labor
(b)
Total
Material
Invoice Cost,
Material
Loading
Parts and
Loading
Charges ÷
Materials = Percentage
Overhead costs
Parts manager’s salary and
benefits
Office employee’s salary
and benefits
Other overhead
Profit margin
Material loading percentage
$34,000
15,000
49,000
÷
$700,000
=
7.00%
42,000
$91,000
÷
÷
$700,000
$700,000
=
6.00%
13.00%
80.00%
93.00%
EXERCISE 8-9 (Continued)
(c) Job: Buil Builders
Labor charges
80 hours @ $69.20 ................................
Material charges
Cost of parts and materials .................
Material loading charge
(93% X $40,000) ................................
Total price of labor and material ...
$ 5,536
$40,000
37,200
77,200
$82,736
PROBLEM 8-2B
(a) Direct materials .........................................................................
Direct labor ................................................................................
Variable manufacturing overhead ............................................
Variable selling and administrative expenses.........................
Variable cost per unit ................................................................
Fixed manufacturing overhead
Fixed selling and administrative
expenses
Fixed cost per unit
$30
20
17
8
$75
Total
Budgeted
Cost
Costs
÷ Volume = Per Unit
$2,500,000 ÷ 100,000 =
$25
500,000 ÷ 100,000
$3,000,000 ÷ 100,000
=
=
Variable cost per unit ................................................................
Fixed cost per unit ....................................................................
Total cost per unit .....................................................................
5
$30
$ 75
30
$105
Desired ROI per unit = 30% X $3,000,000 = $9
100,000
Markup percentage =
$9
$105
= 8.57%
Total cost per unit .....................................................................
Desired ROI per unit ..................................................................
Target selling price ...................................................................
(b) Variable cost per unit ..............................................
$105
9
$114
$75 (same as (a))
Total
Budgeted
Cost
Costs
÷ Volume = Per Unit
$2,500,000 ÷ 80,000 = $31.25
Fixed manufacturing overhead
Fixed selling and administrative
expenses
500,000 ÷
Fixed cost per unit
$2,900,000
80,000
80,000
=
Variable cost per unit ................................................................
Fixed cost per unit ....................................................................
Total cost per unit .....................................................................
Desired ROI per unit =
30% X $3,000,000
= $11.25
80,000
Markup percentage =
$11.25
= 10%
$112.50
Total cost per unit .....................................................................
Desired ROI per unit ..................................................................
Target selling price ...................................................................
6.25
$37.50
$ 75.00
37.50
$112.50
$112.50
11.25
$123.75
P8-2B Robo Parts Inc. is in the process of setting a selling price on a new robotics component it has just
designed and developed. The following cost estimates for this new component have been provided by the
accounting department for a budgeted volume of 100,000 units. Per Unit Total Direct materials $30 Direct labor
$20 Variable manufacturing overhead $17 Fixed manufacturing overhead $2,500,000 Variable selling and
administrative expenses $ 8 Fixed selling and administrative expenses $ 500,000 Robo’s management
requests that the total cost per unit be used in cost-plus pricing its products. On this particular product,
management also directs that the target price be set to provide a 30% return on investment (ROI) on invested
assets of $3,000,000. Instructions (Round all calculations to two decimal places.)
(a) Compute the markup percentage and target selling price that will allow Robo to earn its desired ROI of 30%
on this new component.
(b) Assuming that the volume is 80,000 units, compute the markup percentage and target selling price that will
allow Robo to earn its desired ROI of 30% on this new