Baldwin produces bicycles in a highly competitive market. During the past year, the company has added a 20% markup on the $300 manufacturing cost for one of its most popular models. A new competitor recently entered the market with a competitive model that is priced at $320, seriously eroding Baldwin's market share. Management now desires to use a target-costing approach to remain competitive and is willing to accept a 20% return on sales. If target costing is used, which of the following choices correctly denotes (1) Baldwin's selling price and (2) Baldwin's target cost?

Question

Quizplus · Accepted Answer

Using the target costing approach, Baldwin would first determine the target selling price by subtracting the desired return on sales (20% of selling price) from the competitive price of the new entrant ($320).

Target selling price = $320 - ($320 x 20%) = $256

Next, Baldwin would subtract the desired markup (20% of target cost) from the target selling price to determine the target cost.

Target cost = $256 - ($256 x 20%) = $204.80

Therefore, the correct answer is (C) Baldwin's selling price is $256, and Baldwin's target cost is $204.80.

Baldwin Produces Bicycles in a Highly Competitive Market