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

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SOLUTIONS TO EXERCISES—SET 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

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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 .............................................. Fixed manufacturing overhead (\$3,500,000/500,000) ................................................................. Variable selling and administrative expenses .......................... Fixed selling and administrative expenses (\$1,500,000/500,000) ................................................................. \$ 8 9 15 7 14 3 \$56 (b) Desired ROI per unit = (25% X \$24,000,000)/500,000 = \$12 © 2008 For Instructor Use Only 8-2
EXERCISE 8-5B (Continued) (c) Markup percentage using total cost per unit: \$12 = 21.43% \$56 (d) Target selling price = \$56 + (\$56 X 21.43%) = \$68 EXERCISE 8-6B (a) Total cost per session: Per Session Direct materials \$ 20 Direct labor 400 Variable overhead 50 Fixed overhead (\$950,000 ÷ 1,000) 950 Variable selling & administrative expenses 40 Fixed selling & administrative expenses (\$540,000 ÷ 1,000) 540 Total cost per session \$2,000 (b) Desired ROI per session = (20% X \$2,300,000) ÷ 1,000 = \$460 (c) Mark-up percentage on total cost per session = \$460 ÷ \$2,000 = 23% (d) Target price per session = \$2,000 + (\$2,000 X 23%) = \$2,460 EXERCISE 8-7B (a) Fixed manufacturing overhead per unit = \$1,800,000 = \$600 per unit 3,000 Fixed selling and administrative expenses per unit = \$345,000 = \$115 per unit 3,000 (b) Desired ROI per unit = 20% X \$48,000,000 = \$3,200 per unit 3,000 © 2008 For Instructor Use Only 8-3

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EXERCISE 8-7B (Continued) (c) Per Unit Direct materials ............................................................................
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ch08 - SOLUTIONS TO EXERCISESSET B EXERCISE 8-1B(a The...

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