2. a) Explain the reasons why a company would conduct target pricing and costing and give detailed explanation of the steps involved in the process.

b) Ming Cycles Ltd makes a range of cycles and is interested in expanding to making electrical cycles (E bikes) which have a motor well as pedal power to assist with hill climbing etc. As well as the motor the specifications of the bicycle will need to be more robust than their current bikes. They are looking at the commuting and shopping customer rather than mountain bikers etc.

• Consumer survey and price comparisons has indicated that customers would be prepared to pay 1,200 per bike retail. The retailer normally expects a 20% profit on sales price.
• The company wishes to make 25% profit on full cost
• The following costs have been estimated:
• The Electric motor will cost 180.
• The Cycle frame is bought from an outside supplier. The normal frame costs 80 but the supplier considers that the strengthening specification will cost an additional 15% on the normal price.
• Pedals and other accessories are made in house. The standard cost of these is 40.
• The assembly, painting and finishing should be costed at the ABC costs used in the company as follows:

Activity	Hours needed
Assembly 45 per hour	3
Painting 20 per hour	1
Finishing 35 per hour	2

• Marketing and selling commission are charged at 50 per unit + 10% of sales price to the retailer (paid to the salesman)
• Administration is charged based on production hours at 50 per hour.
• It is planned that 50,000 would be sold in the first month

Required:

Provide a cost calculation and target price for the E-Bike.

c) Describe the investigations you would make to verify or change the estimates in the target price and cost statement and determine whether the project can be made viable. Explain how or why you might question the basis of charging of some of the indirect costs.