Torner, Inc., is an international corporation that manufactures and sells home care products. Today a meeting is being held at corporate headquarters in New York City. The purpose of the meeting is to discuss changing the price of the laundry detergent the company manufactures and sells in Brazil. During the meeting, a conflict develops between Karl Mickleson, the corporate sales manager, and José Tapral, the Brazilian Division's sales manager.
Mickleson insists that the selling price of the laundry detergent should be increased to the equivalent of U.S. $3. This increase is necessary because the Brazilian Division's costs are higher than those of other international divisions. The Brazilian Division is paying high interest rates on notes payable for the acquisition of a new manufacturing plant. In addition, a stronger, more expensive ingredient has been introduced into the laundry detergent, which has caused the product cost to increase by $0.20.
Tapral believes that the laundry detergent's selling price should remain at $2.50 for several reasons. He argues that the market for laundry detergent in Brazil is highly competitive. Labor costs are low, and the costs of distribution are small because the target market is limited to the Rio de Janeiro metropolitan area. Inflation is extremely high in Brazil, and the Brazilian government continues to impose policies to control inflation. Because of these controls, Tapral insists, buyers will resist any price hikes.
1. What selling price do you believe Torner, Inc., should set for the laundry detergent? Explain your answer. Do you believe Torner should let the Brazilian Division set the selling price for laundry detergent in the future? When should corporate headquarters set prices?
2. Based on the information given, should cost-based pricing or target costing be used to set the selling price for laundry detergent in Brazil? Explain your answer.