Target costing vs - UIUC College of Business

Target costing vs. Target pricingMarklee Industries makes electric motors for a variety of small app

Target costing vs. Target pricingMarklee Industries makes electric motors for avariety of small appliances. It sells the motors to manufacturers that assemble and sell the appliances. The company's market research department has discovered amarket for electric motors used for trolling in small fishing boats, which Marklee presently does not produce. The market research department has indicated that mors likely would sell for $46 each. A similar motor currently being produced has the following manufacturing costs: Direct materials $24 Direct labor 10 Overhead 8 Total $42 Assume that Marklee desires an operating profit margin of 10 percent. a. Suppose that Marklee uses cost-plus pricing, setting the price 10% above the manufacturing cost. What price should it charge for the motor? b. Suppose that Marklee uses target costing. What price should it charge for a trolling motor? What is the highest acceptable manufacturing cost for which Marklee would be willing to produce the motor? c. Would you produce such amotor if you were amanager at Marklee? Explain. Transfer pricingThe Glass Division of Sonnet, Inc., manufactures avariety of glasses and vases for household use. The vases can be sold externally or intemally to Sonnet's Florist Division. Sales and cost data on abasic ten-inch vase are given below: Unit selling price$2.50Unit variable cost$1.10 Unit product fixed cost*$0.50Practical capacity in units500,000 *S250,00/500,000 During the coming year, the Glass Division expects to sell 350,000 units of this vase. The Florist Division currently plans to buy 150,000 vases on the outside market for $2.50 each. Neil Harper, manager of the Glass Division, approached Martha Strahorn, manager of the Florist Division, and offered to sell the 150,000 vases for $2.45 each. Neil explained to Martha that he can avoid selling costs of $0.10 per vase by selling intemally and that he would split the savings by offering a$0.05 discount on the usual price. Required What is the minimum transfer price that the Glass Division would be willing to accept? What is the maximum transfer price that the Florist Division would be willing to pay? Should an internal transfer take place? What would be the benefit (or loss) to the firm as awhole if the internal transfer takes place? 1. Suppose Martha knows that the Glass Division has idle capacity. Do you thin that she would agree to the transfer price of $2.45? Suppose she counters with an offer to pay $2.00. If you were Neil, would you be interested in this price? Explain with supporting computations. 2. Suppose that Sonnet, Inc., policy is that all internal transfers take place at full manufacturing cost. What would the transfer price be? Would the transfer take place?