1. 12 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Price products using the target-costing approach.

2. 12 - 2 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Target Price and Target Cost Target price is the estimated price for a product (or service) that potential customers will be willing to pay. Target Price – Target operating income per unit = Target cost per unit

3. 12 - 3 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Target Price and Target Cost Steps in developing target prices and target costs: 1. Develop a product that satisfies the needs of potential customers. 2. Choose a target price. 3. Derive a target cost per unit. 4. Perform value engineering to achieve target costs.

4. 12 - 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Implementing Target Pricing and Target Costing Latisha’s management wants a 15% target operating income on sales revenues of CC. Target sales revenue is $750 per unit. What is the target cost per unit? $750 ×.15 = $112.50, $750 – $112.50 = $637.50 Current full cost per unit of CC is $662.80

5. 12 - 5 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Implementing Target Pricing and Target Costing Value engineering is a systematic evaluation of all aspects of the value-chain business function with the objective of reducing costs.

6. 12 - 6 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value-Added Costs A value-added cost is a cost that customers perceive as adding value, or utility, to a product or service: Adequate memory Pre-loaded software Reliability Easy-to-use keyboards

7. 12 - 7 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Price products using the cost-plus approach.

8. 12 - 8 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Plus Pricing The general formula for setting a cost-based price is to add a markup component to the cost base. Cost base$ X Markup component Y Prospective selling price$X + Y

9. 12 - 9 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Plus Pricing Assume that Latisha’s engineers have redesigned CC into CCI at a new cost of $637.50. The company desires a 20% markup on the full unit cost. What is the prospective selling price?

10. 12 - 10 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Plus Pricing Cost base:$637.50 Markup component: (637.50 ×.20) 127.50 Prospective selling price:$765.00

11. 12 - 11 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Plus Pricing Assume that the capital investment needed for CCI is $75 million, and the company (pretax) target rate of return on investment is 17%. What is the target annual operating income that Latisha needs to earn from CCI? $75,000,000 ×.17 = $12,750,000

12. 12 - 12 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Plus Pricing What is the target operating income per unit? $12,750,000 ÷ 100,000 units = $127.50/unit

13. 12 - 13 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Plus Pricing The 17% target rate of return on investment expresses the company’s expected annual operating income as a percentage of investment. The 20% markup expresses operating income per unit as a percentage of the full product cost per unit.

14. 12 - 14 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Advantages of Using Full Costs Full recovery of all costs of the product Price stability Simplicity

15. 12 - 15 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Alternative Cost-Plus Methods Variable manufacturing costs Variable costs of the product Manufacturing function costs

16. 12 - 16 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 12