Chapter 15, Problem 42P

1.

To determine

Discuss the reason for which the target costing is essential to (a) focus on the customer, and (b) have a marketing team become involved with product design.

Explanation of Solution

Target costing: In a competitive market, companies cannot set prices based on cost alone, because the supply and demand factors affect the product price. The companies should therefore, control costs, in order to earn a desired profit. Therefore, the cost which should be controlled and fixed by companies to earn a desired profit over the market price, is referred to as target cost.

Target costing is done based on the market study, where selling prices are determined first on the basis of the customer willingness to pay. Target costing requires marketing team’s process, because customer’s feedback is very much important for product design.

2.

To determine

Rank the popularity of the 5 modifications using the weighted-average rating approach.

Explanation of Solution

Step 1: First determine weighted average rating for all the 5 modifications.

$\begin{array}{c}\text{Add cabinet doors = }\frac{\left(10\times 1\right)+\left(20\times 2\right)+\left(30\times 3\right)+\left(60\times 4\right)+\left(80\times 5\right)}{200\text{ survey participants}}\\ =\frac{780}{200}\\ =3.9\end{array}$

$\begin{array}{c}\text{Expand storage area = }\frac{\left(10\times 1\right)+\left(40\times 2\right)+\left(70\times 3\right)+\left(50\times 4\right)+\left(30\times 5\right)}{200\text{ survey participants}}\\ =\frac{650}{200}\\ =3.250\end{array}$

$\begin{array}{c}\text{Add security lock = }\frac{\left(30\times 1\right)+\left(60\times 2\right)+\left(50\times 3\right)+\left(40\times 4\right)+\left(20\times 5\right)}{200\text{ survey participants}}\\ =\frac{560}{200}\\ =2.800\end{array}$

$\begin{array}{c}\text{New appearance for table top = }\frac{\left(10\times 1\right)+\left(20\times 2\right)+\left(50\times 3\right)+\left(60\times 4\right)+\left(60\times 5\right)}{200\text{ survey participants}}\\ =\frac{740}{200}\\ =3.700\end{array}$

$\begin{array}{c}\text{Extend warranty = }\frac{\left(40\times 1\right)+\left(70\times 2\right)+\left(30\times 3\right)+\left(35\times 4\right)+\left(25\times 5\right)}{200\text{ survey participants}}\\ =\frac{535}{200}\\ =2.675\end{array}$

Step 2: Now rank the five proposed modifications from strongest to weakest based on the above determined weighted average ratings.

Ranking	Proposed modifications
1	Add cabinet doors (3.900)
2	New appearance for table top (3.700)
3	Expand storage area (3.250)
4	Add security lock (2.800)
5	Extend warranty (2.675)

Table (1)

3. a.

To determine

Determine the highest cost of the modified table, if Company DF uses target costing to meet the current competitive selling price.

Explanation of Solution

Company DF earns a profit of  $16 $\left(\$80-\$64\right)$ on sale of each table, which is 20% $\left(\frac{\$16}{\$80}\right)$ markup on sales . Now, under the current competitive market price of $95, it will earn $19 per unit $\left(\$95\times 20\%\right)$. Therefore, if Company DF uses target costing to meet the current competitive selling price, then the maximum allowable cost would be $\left(\$95-\$19\right)$ $76.

3.b.

To determine

Identify the modification which should be considered by Company DF.

Explanation of Solution

Determine the cost to additional features.

Particulars	Cost
Maximum allowable cost	$76.00
Less: Current cost	$64.00
Cost of additional features	$12.00

Table (2)

Identify the modifications which can be afford at the maximum allowable cost.

Particulars	Cost
1. Add cabinet doors	$6.00
2. New appearance for table top	$4.25
Subtotal	$10.25
4. Add security lock	$1.65
Total	$11.90

Table (3)

Company DF cannot afford to add third and fifth modifications (that is expanded storage area and extended warranty), as it is too costly. Whereas customers feel good in adding cabinet doors and giving the table top a new appearance. Moreover, management can add a lock to the storage area, if it desires.

4.

To determine

Identify the process which might the company should be allowed to adopt by the management to make its target profit for the table.

Explanation of Solution

As per ranking no. 3, an expanded storage area would be the most reasonable additional feature for the table, which is excluded in requirement 3.b. Company DF can use value engineering concept to study the design and production process of both the table as currently manufactured as well as the proposed new features.  The objective is to identify improvements and associated reductions in cost that may permits the company to add formerly rejected features.