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Great Decor (GD) manufactures and sells customised kitchen cabinet. The current kitchen cabinet costs about RM2,000 per set and GD has been using the
Great Decor (GD) manufactures and sells customised kitchen cabinet. The current kitchen cabinet costs about RM2,000 per set and GD has been using the cost-plus pricing approach marking its product up to approximately 25 percent of total cost. The company has been profitable; however, it has recently lost considerable business to competitors that have become very aggressive in the marketplace. As part of the effort to improve the company's profitability, the firm is considering introducing a new design of kitchen cabinet next year. GD's cost accountant presents the following cost data for the expected production of 80 sets. Design and specification Direct materials RM 8,000 RM 32,000 Direct manufacturing labor RM 38,000 Variable manufacturing overhead RM 32,000 Fixed manufacturing overhead RM 26,000 RM 14,000 Marketing An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that GD is considering and other models having only a few. The current market price of similar model is around RM2,000. Assume that GD's target operating income (profit margin) is 25% of revenue. Required: 2. GD's cost accountant found that competitors appear to be using a target costing approach and suggests that GD should also use the same approach in its pricing strategy. Explain the following: What is a target costing approach and how does it relate to pricing strategy? (3 marks) b. How can GD Pagey the approach to s bo curtent and new model of kitchen cabinets?
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