1. Target costing is the process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably made for that maximum cost figure.

True

2. The formula for target cost is:

Target cost = Anticipated selling price - Desired profit.

3. The price elasticity of demand is NOT used to determine the markup over cost when computing the profit-maximizing price.

False

4. In target costing, effort is concentrated on effectively marketing the product to maximize its selling price.

False

5. Price elasticity measures the degree to which consumers resent an increase in price.

False

6. Most of the opportunities to reduce the cost of a product come from designing the product so that it is simple to make, uses inexpensive parts, and is robust and reliable.

True

7. Fairfax Company is really hot on entering the smart telephone market. The management personnel at Fairfax believe that to be competitive, the price of the Fairfax smart telephone being developed by the company must not exceed $74. The required rate of return at Fairfax Company is 22% on all investments. Fairfax would have to invest $3,000,000 to purchase the equipment needed to produce the 43,000 smart telephones that Fairfax management believes can be sold each year at the $74 price.
   
   Required:
   Compute the target cost of one smart telephone.

Sales $3,182,000
Less desired profit 660,000
Target cost for 43,000 units $2,522,000
Target cost per unit $58.65

Explanation:
Sales (43,000 units × $74 per unit) = $3,182,000
Less desired profit (22% × $3,000,000) = $660,000
Target cost per unit = ($2,522,000 ÷ 43,000 units) = $58.65 per unit

8. Lockeed Marretta Company is exploring the possibility of introducing a new product. Lockeed has developed the following data in order to help determine a selling price for that new product.
   
   
   Number of units to be produced and sold each year 16,500
   Unit product cost $ 50
   Projected annual selling and administrative expenses $ 60,000
   Estimated investment required by the company $ 530,000
   Desired return on investment (ROI) 20 %
   
   
   The absorption costing approach to cost-plus pricing is used at Lockeed Marretta Company for such decisions.
   
   Required:
   1. Compute the markup required to achieve the desired ROI. (Round your Required ROI answers to the nearest whole percentage (i.e, 0.1234 should be entered as 12). Round your "Markup Percentage" answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34.))

Required ROI 20 %
Investment $530,000
Selling and administrative expenses 60,000
Total production cost $166,000
Unit product cost per unit $50
Unit sales 16,500
Total sales $825,000
Markup percentage 20.12 %

Explanation:
1.
Markup percentage on absorption cost = (Required ROI × Investment) + Selling and administrative expenses
Unit sales× Unit product cost


= (20% × $530,000) + $60,000
16,500 units × $50 per unit

= $166,000
$825,000


= 20.12%

9. Lockeed Marretta Company is exploring the possibility of introducing a new product. Lockeed has developed the following data in order to help determine a selling price for that new product.
   
   
   Number of units to be produced and sold each year 16,500
   Unit product cost $ 50
   Projected annual selling and administrative expenses $ 60,000
   Estimated investment required by the company $ 530,000
   Desired return on investment (ROI) 20 %
   
   
   The absorption costing approach to cost-plus pricing is used at Lockeed Marretta Company for such decisions.
   
   2. Compute the selling price per unit. (Round your intermediate and final answers to 2 decimal places. )

Unit product cost $50.00
Markup 10.06
Selling price per unit $60.06

2.
Markup = 20.12% × $50 = $10.06

10. differential cost.

A difference in cost between any two alternatives is known as a