Goga Pte Ltd is a manufacturer of electronic tools used by commercial establishments. The Company seeks your assistance in the pricing decision of one of its newly developed known as P12.

The company pricing policy is to establish selling prices by applying a mark-up on full manufacturing cost of 25% to 35 %.

A possible price is sought for P12.

The total market for this product is estimated at 300,000 units per annum. Market research indicates that the company could expect to obtain about 15% of the market. It is hoped the product will offer some improvement over similar competitors products, which are currently marketed at around $900 each. The customer price survey conducted indicated that 80% of customer were willing to purchase the product at a price between $900 to $1,000 depending on the quality of the different competitors product.

The product development department have determined that the direct material content is $90 per unit. Each unit of the product will take 10 labour hours to complete. Hourly labour rates are $30 per hour. Variable manufacturing overhead cost are $20 per labour hour. Annual fixed manufacturing cost is estimated at $300,000 per annum. Selling and administration cost are estimated at 20% of product cost.

Required:

(a) Briefly discuss three determinants of a pricing decisions. (6 marks)

(b) Provide the costing required to determine the appropriate price in accordance with the companys pricing policy. (12 marks)

(c) Comment on the cost information and recommend a price for the product, taking into consideration the three determinants in part (a). (7 marks)

(d) Assuming next that the company uses a target costing approach and desires a margin of 25%. Compute the target cost and comment of your results. (10 marks)

(e) Discuss three advantages of target costing versus cost-based pricing methods. (9 marks).

(f) Briefly discuss three practical methods to eliminate a cost gap in target costing. (6 marks