Matchless Corporation manufactures variety of desks, chairs, tables and shelf units that are marketed to small businesses. The company has been in business for 20 years and has been profitable each of the past 15 years. Matchless uses the full cost approach to cost-plus pricing by adding 10% mark up in setting its price. Full cost has been defined as including all variable costs of manufacturing the product, a reasonable amount of fixed overhead, and reasonable administrative costs associated with the manufacture and sale of the product. Currently, the company is operating at 60% capacity.

Management has recently received a request to bid on the manufacture of 40,000 sets of desk and-chair. The contractor has indicated that bids in excess of RM36 per set are not likely to be considered. The sales manager of Matchless wants to set the bid at RM35 because she is sure that Matchless will get the business at that price. In order to prepare the bid for the 40,000 desk and-chair sets, Matchlesss controller has gathered the following information about the costs associated with the production of the desk-and-chair sets.:

Direct material (3 cubic meters per set) RM3.00 per cubic meter

Direct labor (0.5 hours per set) RM10.00 per direct labor hour Variable overhead RM8.00 per direct labor hour Fixed Overhead* RM6.00 per set

Fixed Administrative costs* RM8.00 per set

*Assume production level of 100,000 units

Required:

a. Compute the current price per set for Matchlesss desk-and chair set. (6 marks)

b. Calculate the minimum price that Matchless could bid. Is the sales manager correct in setting the price? Explain your answer.

(5 marks)

c. Independent of your answer to requirement (b). Assume that the price per desk-and-chair sets that Matchless calculated using the cost-plus pricing is greater than the RM36 maximum bidding price allowed. Discuss the factors that management should consider before deciding whether to submit a bid at the maximum price of RM36 per desk-and-chair

set.

(4 marks)

d. Assume that Matchless is successfully to get the bid at a price of RM36. Prepare full contribution income statement for the company as a whole.

(6 marks)

e. What is target costing? How do target costs impact pricing decision?