Kitty Co produces packing materials used in bagging system. The company has developed a new material which will reduce the packing time for grocery stores. It is hoped that the

resulting fall in costs will make the product attractive to large grocers. However initial customer trials have indicated that customers are concerned that the products effective life will

be shorter than that of the traditional products which it is intended to replace. One potential customer has agreed to use the product for a trial period. This customer will not

pay more than RM45.00 per kg, and requires 10,000 kg per month. It has been agreed that this will be ordered in batches of 250 kg.

Kitty Co uses a variable cost-plus approach to pricing, and adds 50% margin to variable cost to calculate selling price. Activity based costing is used to calculate overheads.

It has been suggested that the company should use a target cost approach to pricing for this product.

You have been asked to consider the companys options and to report back to the management team.

The following information has been collected:

Product Costs:

Materials RM8.00 per kg produced

Labour RM9.00 per kg produced

You have estimated that each 200 kg produced will require four deliveries of raw materials, and eight machine hours.

Company Overheads:

Machine running RM276,250 per year

Materials handling RM118,500 per year

Order processing RM390,000 per year

Activity levels (for the company)

Machine hours 5,000 per year

Materials deliveries 2,000 per year

Customer orders 3,000 per year

All computations are to be rounded up to its nearest 2 decimal point.

Required:

a) Compare and contrast variable cost-plus pricing and target pricing, and indicate the circumstances in which each might be appropriate. (8 marks)

b) Compute the selling price based on the compays pricing policy and indicate whether the customers maximum price is consistent with the companys pricing policy. (8 marks)

c) Assume that further tests have confirmed the products useful life, and that SA Berhad wishes to maximise profits by reducing costs. Indicate techniques which could be used to

achieve a reduction in the product cost. (5 marks)