Best Price is a small manufacturing entity with operations outside Okahandja, they have launched a new product, Dooley into the local market. The price for the new product has not stabilized as the price that penetrated the market was set very low. The marketing and finance managers agree that there is now sustainable demand for the product and the price can be increased with little to no consequence.

You, a management accounting student, have been asked to advise the company as they attempt to price this product and ensure increased profitability. You are provided with the following information in this regard:

	Unit cost
Direct material	130
Direct labour	250
Overheads (70%) fixed	600
Selling and distribution	100

Estimated demand levels for different prices

Price range	Range of units	Market condition
400 - 600	10 000 - 13 000	uncertain
600 - 800	12 000 - 16 000	stable
1100 - 1300	9 000 - 16 000	very uncertain

The margin is 25% and the company expects to reach breakeven point at 12 000 units while capacity is 15 000 units. Pricing options are based on prime cost, variable manufacturing cost and full manufacturing cost.

REQUIRED:

a) Applying the concepts in cost plus pricing, after having selected and justified an appropriate base, how would you calculate the price to be set for Doley? [7 marks]

b) If the market set a price at N$1 200 and target profit was the same % as the margin, demonstrate how you would apply target costing to this scenario. [3 marks]