Question

QUESTION 3 Clear Sound Ltd. produces stereo speakers. The company is considering a modification to one of its models - CSIIX, that would make it more attractive to customers. One unit of CSIIX currently costs RM250 and sells for RM300. Unit cost RM150 90 Variable manufacturing cost Fixed manufacturing cost Variable selling and administrative Total costs RM250 Clear Sound's marketing department carried out a market research at a cost of RM50,000 and as a result, has discovered that the following modifications are necessary Unit cost RM12 Modification Add Bluetooth technology Introduce pastel colours design Extend warranty to five years Total modification costs RM25 In addition, an analysis of competitive stereo speakers in the market revealed a variety of features, with some models having all of the features that Clear Sound is considering. The current market price for the similar models averages RM315. Clear Sound uses absorption cost criteria to set the selling price for all its models Required: a. Calculate the current rate of profit margin for CSIIX. (2 marks) b. Using the current cost plus pricing approach, can Clear Sound meet the competitive market price of modified CSIIX? Why or why not? (6 marks) c. Assume that Clean Sound uses target costing in meeting the competitive market price of modified CSIIX. By how much should the current cost be reduced if the company desires to earn the same rate of profit margin that is currently being carned? (6 marks) d. Why there is a need in target costing to focus on the customer and have a marketing team become involved with product design? (4 marks) e. Explain how the use of relevant costs as the basis of setting a selling price may be appropriate for short-term pricing decisions but may be inappropriate for long-term pricing decisions. (4 marks) f. Define price discrimination. How is this "action" viewed from the Islamic perspective? Discuss (3 marks) TOTAL: 25 MARKS

Answer 1

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Computation paofit macigin- f Curent rat RM300 Sale valee Less: Total cost Profit Paofit margin 16.66%. fPaefit 50 300 Sales 5) modified mashot paice ) Sale price after modification = RM315 Sale should be paice aftes adding maagio. Cost Caso+2s) = Ro Rm a7s Add: Maagin ®6.66% on sales 275x 16.66 ৪৪.3৭ sale valre - RM 33O

Thus the modified sale rate does not meel the company's Sraçcui sed moogin The sale paice should be RM33O but in maskel it fetih.only RM315 ) Using Toegel cost approach Sale paèce RM315 [email protected]% on sale psice Less: RMs2 (315x 16:66%) RED 263 Taoget cosk Thus the cost of modification shall be limited to RD13 rather than Rmas. (Am13 p Tasget cost CRma63) -0eiginal cost (Rmaso) Thue the cost Sredeeclion must be $ Rm 12 being differene RM263.

d) The taogel costing ig veay menh necuessœy paofil lon the company In the TAodern ompetetive maket the Sale paie is decidad by: competetive factors which is not fully in control of Company must fous to redure it & achiv desioed. paofitability. desised get to Henle company cost of paodeest The custornes fouiet be fouolued in target costing to understand the need ceestomes & thue Saduning Lenneccessry cost t cwhich etomer ip pot desi sod to pay. very much bave Knoledge of custormer tdede, hence they miest closely ooat with desigo team to make pesferb paodnt dosign Toa shich' castomes ig wilBong to. pay. The marheting team i's