John Hulsey

Managerial Accounting: MGMT 201 Spring 2017

C(22)

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Problem 15-44 Target Costing (LO 15-3, 15-5, 15-6, 15-8)

Maritime Services Corporation (MSC) will soon enter a very competitive marketplace in which it will have limited influence over the prices that are charged. Management and consultants are currently working to fine-tune the companys sole service, which they hope will generate a 12 percent first-year return (profit) on the firms $18,900,000 asset investment. Although the normal return in MSCs industry is 14 percent, executives are willing to accept the lower figure because of various start-up inefficiencies. The following information is available for first-year operations:

Hours of service to be provided: 30,000

Anticipated variable cost per service hour: $21.10

Anticipated fixed cost: $1,980,000 per year

References

Section BreakProblem 15-44 Target Costing (LO 15-3, 15-5, 15-6, 15-8)

2.

value: 1.00 points

Required information

Problem 15-44 Part 1

Required:

1.

Assume that management is contemplating what price to charge in the first year of operation. The company can take its cost and add a markup to achieve a 12 percent return; alternatively, it can use target costing. Given MSCs marketplace, which approach is probably more appropriate?

	Cost-plus-markup approach
	Target costing

References

eBook & Resources

ProblemLearning Objective: 15-03 Set prices using cost-plus pricing formulas.Learning Objective: 15-08 Explain the process of value engineering and its role in target costing.

Problem 15-44 Part 1Learning Objective: 15-05 List and discuss the key principles of target costing.

Difficulty: MediumLearning Objective: 15-06 Explain the role of activity-based costing in setting a target cost.

Check my work

3.

value: 1.00 points

Required information

Problem 15-44 Part 2

2.	How much profit must MSC generate in the first year to achieve a 12 percent return?

References

eBook & Resources

ProblemLearning Objective: 15-03 Set prices using cost-plus pricing formulas.Learning Objective: 15-08 Explain the process of value engineering and its role in target costing.

Problem 15-44 Part 2Learning Objective: 15-05 List and discuss the key principles of target costing.

Difficulty: MediumLearning Objective: 15-06 Explain the role of activity-based costing in setting a target cost.

Check my work

4.

value: 1.00 points

Required information

Problem 15-44 Part 3

3.	Calculate the revenue per hour that MSC must generate in the first year to achieve a 12 percent return. (Round your answer to 2 decimal places.)

References

eBook & Resources

ProblemLearning Objective: 15-03 Set prices using cost-plus pricing formulas.Learning Objective: 15-08 Explain the process of value engineering and its role in target costing.

Problem 15-44 Part 3Learning Objective: 15-05 List and discuss the key principles of target costing.

Difficulty: MediumLearning Objective: 15-06 Explain the role of activity-based costing in setting a target cost.

Check my work

5.

value: 1.00 points

Required information

Problem 15-44 Part 4

4.

Assume that prior to the start of business in year 1, management conducted a planning exercise to determine if MSC could attain a 14 percent return in year 2. If the competitive pressures dictate a maximum selling price of $160 per hour and service hours and the variable cost per service hour are the same as the amounts anticipated in year 1, calculate the following amounts to determine if this return can be achieved.

a.	How much profit must MSC generate in the second year to achieve a 14 percent return?

c.	Calculate the revenue per hour that MSC must generate in the second year to achieve a 14 percent return. (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

d.

Can the company achieve this return?

	Yes
	No

References

eBook & Resources

ProblemLearning Objective: 15-03 Set prices using cost-plus pricing formulas.Learning Objective: 15-08 Explain the process of value engineering and its role in target costing.

Problem 15-44 Part 4Learning Objective: 15-05 List and discuss the key principles of target costing.

Difficulty: MediumLearning Objective: 15-06 Explain the role of activity-based costing in setting a target cost.

Check my work