Donner, Inc. produces a number of components that are used in sleighs. Sam Claus, head of the company's market research department, has identified the need for a new component that will most likely sell for $92. Projected volume levels are anticipated to reach 35,000 units in the first year, as several firmly entrenched competitors will be offering the same product soon.

Here are the following cost estimates for the new component:

Direct materials: 22 Direct labor: 40 Manufacturing overhead: 18 Selling and administrative expenses: 6

Donner currently uses cost-plus pricing and adds a 25% markup on total production cost to arrive at what is normally a competitive selling price.

Required: 1. Describe the four major influences on pricing decisions.

2. What is the anticipated selling price of the new component if Donner uses its current pricing policy? What difficulties might the company face in the marketplace?

3. Assume that Donner decides to switch to target costing. What price would the company charge for the new component?

4. With the switch to target costing, what would Donner have to do to the component's manufacturing cost to achieve the normal profit margin on sales? Be specific and show calculations (show the new product cost and then the reduction required).

5. What is value engineering, and how can Donner use it to meet cost requirements (list at least three ways)?