PROBLEM 10 - 4. Target profit = asset investment x rate of...

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PROBLEM 15-44 (25 MINUTES) 1. Target costing is more appropriate. MSC is limited in terms of what price it can charge due to market conditions. A cost-plus-markup approach will use the desired markup for the company; however, the resulting price may too high and not competitive. In such an environment it makes more sense to use target costing, which begins with the price to be charged and works backward to determine the allowable cost. 2. Target profit = asset investment x rate of return = $27,000,000 x 12% = $3,240,000 3. Revenue = target profit + variable cost + fixed cost = $3,240,000 + (25,000 hours x $33) + $2,850,000 = $6,915,000 Since total revenue must equal $6,915,000, the revenue per hour must be $276.60 ($6,915,000 ÷ 25,000 hours).
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Unformatted text preview: 4. Target profit = asset investment x rate of return = $27,000,000 x 14% = $3,780,000 Revenue = target profit + variable cost + fixed cost = $3,780,000 + (25,000 hours x $33) + $2,850,000 = $7,455,000 No. A 14% return requires that MSC generate revenue per service hour of $298.20 ($7,455,000 25,000 hours), which is clearly in excess of the $265 market price. 5. To achieve a 14% return and a $265 revenue-per-hour figure, the company must trim its costs. MSC could use value engineering, a technique that utilizes information collected about a services design and associated production process. The goal is to examine the design and process and then identify improvements that would produce cost savings....
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This document was uploaded on 02/01/2011.

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