ch08 - SOLUTIONS TO EXERCISESSET B EXERCISE 8-1B (a) The...

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Unformatted text preview: SOLUTIONS TO EXERCISESSET B EXERCISE 8-1B (a) The target cost formula is: Target cost = Market price Desired profit. In this case, the market price is $15 and the desired profit is $3 (20% X $15). Therefore the target cost is $12 ($15 $3). (b) Target costing is particularly helpful when a company faces a competi- tive 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 8-2B The following formula may be used to determine return on investment Investment X ROI percentage = Return on investment $7,500,000 X 20% = $1,500,000 Return on investment per unit is then $15 ($1,500,000 100,000) The target cost is therefore $75 computed as follows: Target cost = Market Price Desired profit $75 = $90 $15 EXERCISE 8-3B (a) (1) In this case the selling price would be $130 ($100 + [$100 X 30%]). The problem with the $130 is that it is unlikely that Swim-King will be able to sell any All-Body suits at that price. Market research seems to indicate that it will sell for only $110. (2) One way that Swim-King 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 $110 level. (b) In this case the amount would be the selling price of $110. 2008 For Instructor Use Only 8-1 EXERCISE 8-3B (Continued) (c) The highest acceptable cost would be the target cost. The target cost is $80 as shown below: Target cost = Market price Desired profit $80 = $110 $30 EXERCISE 8-4B (a) Total cost per unit: Per Unit Direct materials............................................................................ Direct labor................................................................................... Variable manufacturing overhead.............................................. Fixed manufacturing overhead ($450,000/30,000)...................................................................... Variable selling and administrative expenses.......................... Fixed selling and administrative expenses ($150,000/30,000)...................................................................... $17 8 11 15 4 5 $60 (b) Target selling price = $60 + (40% X $60) = $84 EXERCISE 8-5B (a) Total cost per unit: Per Unit Direct materials............................................................................ Direct labor................................................................................... Variable manufacturing overhead.................................................
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This note was uploaded on 12/12/2009 for the course ACCT 2102 taught by Professor Constable,d during the Fall '08 term at Georgia Perimeter.

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ch08 - SOLUTIONS TO EXERCISESSET B EXERCISE 8-1B (a) The...

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