Question

For many years, Leno Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 25 percent of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing. An example of Leno's problem is typified by item no. 8976, which has the following unit-cost characteristics: Direct material Direct labor Manufacturing overhead Selling and administrative expenses $ 90 220 140 70 The going market price for an identical product of comparable quality is $570, which is significantly below what Leno is charging. 5. Suppose that by previous cost-cutting drives, costs had already been “pared to the bone” on item no. 8976. What might Leno be forced to do with its markup on cost to remain competitive? By how much? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places (i.e., 1234 should be entered as 12.34).) Reduce markup by %

Answer 1

As Cost had already been "pared to bone" means impossible to reduce Leno corporation have to reduce its markup for market competition.

       Statement Showing Change in Markup

Target Selling Price	$570
Less. Total Cost $ ( 90 + 220 + 140 + 70) (Direct Material + Direct Labor + Manufacturing Overhead + Selling and Administrative Expenses)	$520
Markup	$50
Markup in percentage to Cost price 50/520 = .09615	9.62 %
Current Mark up on Cost	25 %
Reduction in Markup ( 25% - 9.62 %)	15.38%

Reduction in Markup by 15.38%

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