For many years, Lehigh 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 Lehighs problem is typified by item DC66, which has the following unit-cost characteristics:

Direct material	$	105
Direct labor		220
Manufacturing overhead		150
Selling and administrative expenses		85

The going market price for an identical product of comparable quality is $600, which is significantly below what Lehigh is charging.

Required:

1.

Which of the two approaches could be aptly labeled price-led costing?

	Target costing
	Cost-plus pricing

2.	What is Lehighs current selling price of item DC66?

3.	If Lehigh used target costing for item DC66, by how much must costs change if the company desires to meet the market price and maintain its current rate of profit on sales? Increased or Reduced its cost by-

4.

Would the identification of value-added and non-value-added costs assist Lehigh in this situation?

	Yes
	No

5.	Suppose that by previous cost-cutting drives, costs had already been pared to the bone on item DC66. What might Lehigh be forced to do with its markup on cost to remain competitive? By how much must the markup change? (Do not round intermediate calculations. Round your percentage answer to two decimal places (i.e. .1234 should be entered as 12.34).)

6.

In many industries, prices are the result of an interaction between market forces and costs.

	True
	False