P15-41

1. In my own words, cost-plus pricing is forward calculations and target costing is

backward calculations. In cost-plus pricing, we estimate the projected costs or
the real costs. Based on this amount, we add a markup in order to get a selling price.
In contrast, target costing starts with an appropriate selling price which is substracted
from the price in order to target the achieved costs.

2. Total costs
Direct material 30
Direct labor 75
Manufacturing overhead 50
Selling and administrative expenses 25
Total costs 180

Selling price = Total costs + Markup * Total costs

= 180 + 180 * 25%
= $ 225

3. Current profit = 225 - 180 = $45

Current rate of profit on sales = 45 / 225 * 100% = 20%

Targeted profit to maintain 20% rate of profit on sales when selling price is $195:
Targeted profit = $39 = 195 - Total costs
Total costs = $156
As such, total costs should be reduced by $24 per unit (=180-156)

4. Yes, the identification of value added and non value added costs will assist Leno to
achieve its costs reduction. Non-value-added costs are unnecessary or insignificant
to the product or service in terms of both qualitative and quantitative performances.
As such, identifying and reducing those non-value-added costs will help the firm
to be more competitive in terms of price in the market.

5. . Selling price = Total costs + Markup * Total costs

195 = 180 + 180 * X%
X = 8.33%
As such, in order to maintain the competitive price without touching the total
costs, the firm should reduce its markup percentage on total costs from 25% to
8.33%.

6. "Prices are the result of an interaction between market forces and costs" means that
determining an appropriate selling price highly depends on the market forces or market
conditions such as competitive factors, customers demand, level of supply, etc.
7. Spreadsheet
2) Total costs
Direct material 25
Direct labor 85
Manufacturing overhead 50
Selling and administrative expenses 25
Total costs 185

Selling price = Total costs + Markup * Total costs

= 185 + 185 * 25%
= $ 222.50

3. Current profit = 225 - 185 = $40

Current rate of profit on sales = 40 / 225 * 100% = 17.78%

Targeted profit to maintain 17.78% rate of profit on sales when selling price is $195:
Targeted profit = $34.667 = 195 - Total costs
Total costs = $160.33
As such, total costs should be reduced by $24.667 per unit (=185-160.33)