NuCo Inc., a medical supplies manufacturing company, is developing a new product, which will compete with similar products introduced within the last year. NuCos strategy has traditionally been to compete on price, because of its ability to keep costs under control. For the new product, NuCo is planning a selling price lower than the existing products, possibly appealing to a broader customer base. A financial analyst is determining the selling price for the new product launch.

The company requires a 15% after-tax return on investment (ROI) and their effective income tax rate is 35%. Forecasted data for the new product are shown here.

Plant investment	$ 2,500,000
Annual fixed costs	350,000
Annual working capital	750,000
Direct labor per hour	$25
Direct materials per pound	3
Variable overhead per direct labor hour	10
Annual unit sales	10,000
Direct labor hours per unit	2
Materials quantity per unit	25

Required:

1. Using cost plusbased pricing, what selling price should be set for the new product? Show your calculations.
2. Assume that the marketplace will accept a price of $200. Using market-based pricing, what target cost would allow NuCo to reach its required 15% after-tax ROI? Show your calculations.
3. Identify and describe one way to reduce fixed costs, working capital, and direct labor hours per unit, respectively.
4. Explain the difference between cost-based pricing and market-based pricing.
5. Define target pricing and identify the main steps in developing target prices and target costs.
6. Define and explain the role of price elasticity of demand in pricing decisions. Explain how the level of elasticity affects the way changing prices can change total revenue.