Question

Ericsson is a large global company providing hardware, software, and related services for radio-access networks within mobile telecommunication systems. Assume that it is developing a new networking system for smaller, private telephone companies. To attract small companies, Ericsson must keep the price low without giving up too many of the features of larger networking systems. A marketing research study conducted on the company’s behalf found that the price range must be $50,000 to $75,000. Management has determined a target price to be $65,000. The company’s minimum profit percentage of sales is normally 15%, but the company is willing to reduce it to 12% to get the new product on the market. The fixed costs for the first year are anticipated to be $8,000,000. If sales reach 400 installed networks, the company needs to know how much it can spend on variable costs, which are primarily related to installation.

1. What is the amount of total cost allowed if the 12% profit target is allowed and the 400 installations sales target is met? Show the amount for fixed and for variable costs.

2. What is the amount of total costs allowed if the 15% normal profit target is desired at the 400 installations sales target? Show the amount for fixed and for variable costs.

3. Discuss the advantages of using a target costing model versus using cost-based pricing.

Answer 1

advantage of target costing

When implementing the target-costing pricing strategy, you must recognize that to achieve the desired profits, your company must focus on controlling costs because this strategy doesn’t pass costs on to customers in terms of higher prices. Because the unit price and profit is set when this pricing model is used, there is no wiggle room for fluctuations in costs. it is better for small and competing seller of products