Madison produces bicycles in a highly competitive market.During the past year,the company has added a 30% markup on the $250 manufacturing cost for one of its most popular models.A new competitor manufactures a similar model,has established a $300 selling price,and is seriously eroding Madison'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)the price that Madison will charge and (2)company's target cost?

Question

Quizplus · Accepted Answer

To use target costing approach, we need to determine the target selling price and then subtract the desired profit margin to arrive at the target cost.

1. Madison's target selling price can be calculated as follows:

Target selling price = Competitor's selling price - Desired profit margin 
Target selling price = $300 - 20% of $300 
Target selling price = $300 - $60 = $240

2. Madison's target cost can be calculated as follows:

Target cost = Target selling price - Desired profit margin 
Target cost = $240 - 20% of $240 
Target cost = $240 - $48 = $192

Therefore, Madison will charge a price of $240 (Choice A) and the company's target cost is $192.

Madison Produces Bicycles in a Highly Competitive Market