Question

13-23 Cost-plus, target pricing, working backward. KidsPlay, Inc., manufactures and sells table sets. In 2016, it reported the following: Units produced and sold Investment Markup percentage on full cost Rate of return on investment Variable cost per unit 3,000 $3,000,000 10% 15% $600 Required: 1. What was KidsPlay's operating income in 2016? What was the full cost per unit? What was the selling price? What was the percentage markup on variable cost to achieve the selling price? What are the total fixed costs? 2. KidsPlay is considering increasing the annual spending on advertising by $200,000. The managers believe that the investment will translate into a 10% increase in unit sales. Should the company make the investment? Show your calculations. 3. Refer back to the original data. In 2017, KidsPlay believes that it will be able to sell only 2,700 units at the price calculated in requirement 1. Management has identified $185,000 in fixed cost that can be eliminated. If KidsPlay wants to maintain a 10% markup on full cost, what is the target variable cost per unit? 4. What is target costing? DOES DESIGN AFFECT TARGET COSTING2... (EXPLAIN IN NO MORE THAN HALF OF A PAGE)

Answer 1

ANSWER

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1. Investment = $3,000,000. Rate of return = 15%. Thus operating income = 15% of $3,000,000 = $450,000

Operating income per unit = $450,000/3,000 units = $150 per unit.

Thus full cost per unit = $150/10% = $1,500

Selling price = $1500 (as determined above)+$150 (operating income per unit) = $1,650

Mark up on variable cost = selling price - variable cost = 1650-600 (as provided in the question) = 1050. Thus markup % = 1050/600*100 = 175%

Total fixed costs = (cost per unit - variable cost per unit)*no. of units sold = (1500-600)*3,000 = $2,700,000

2. Contribution margin per unit = 1650-600 = 1050. Increase in sales = 10% of 3000 = 300

Thus incremental contribution margin = $1050*300 units = $315,000

From this advertising costs will be deducted. Thus 315,000 - 200,000 = $115,000

As operating income increases by $115,000 the additional spending on advertisement can be done.

3. Revenue = $1650*2700 units = $4,455,000

At 10% mark up the target full cost = 4455000/1.1 = $4,050,000

Target fixed costs = 2,700,000-185,000 = 2,515,000

Thus target variable costs = 4,050,000-2,515,000 = $1,535,000

Target variable cost per unit = $1,535,000/2700

= $568.52 per unit