1 Required information [The following information applies to the questions displ
ID: 2529672 • Letter: 1
Question
1 Required information [The following information applies to the questions displayed below] For many years, Leno Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 25 percent of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing. An example of Leno's problem is typified by item no. 8976, which has the following unit-cost characteristics: Direct material Direct labor Manufacturing overhead Selling and administrative expenses $ 75 205 125 55 The going market price for an identical product of comparable quality is $510, which is significantly below what Leno is charging. Required 1. Which of the two approaches could be aptly labeled price-led costing?Explanation / Answer
In a competitive environment, companies are price-taker rather than price-maker. Target costing is aimed at setting a target cost by subtracting a desired profit margin from a competitive market price. Target costing decomposes the target cost at omponents level so that the company can negotiate with vendors accordingly. The main rule is to never exced the target cost. The aim of target costing is not to minimize costs, but to achieve a desired level of product costs to remain in the competitive market.
In highly competitive industries like health care, FMCG, selling prices are detremined by supply and demand in the market. Companies can't control the selling prices. They focus on effective cost management by controlling target costs at components level.
In the given case, due to competition from foreign companies, the selling price seems to be out of control of Leno. So, they should start using target costing to conrol the compenent costs. They should evaluate as to which components cost can be brought down so that the the total product costs fall within the target cost.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.