Allred Furniture manufactures easy-to-assemble wooden furniture for home and office. The firm is considering modification of a bookcase, and the company's marketing department surveyed potential buyers regarding five proposed changes (A-E). The buyers' responses, in order of preference, along with Allred's related unit costs for the modifications, follow.Order of PreferenceChangeCost1A$7.502D5.003B4.004C1.505E5.50The bookcase currently costs $81 to produce and distribute, and Allred's selling price for this unit averages $108. An analysis of competitive products in the marketplace revealed a variety of features, with some models having all of the changes that Allred is considering and other models having only a few. The current manufacturers' selling prices on these bookcases average

Question

$120.Required:A. Why is there a need in target costing to (a) focus on the customer and (b) have a marketing team become involved with product design?B. Management desires to earn approximately the same rate of profit on sales that is being earned with the current design.1. If Allred uses target costing and desires to meet the current competitive selling price, what is the maximum cost of the modified bookcase?2. Which of the modifications should Allred consider?C. Assume that Allred wanted to add a modification or two that you excluded in your answer to requirement "B2." What process might management adopt to allow the company to make its target profit for the bookcase? Briefly explain.

What will be an ideal response?

Answer 1

A. Target costing is market driven, beginning with a determination of the selling price that customers are willing to pay. That price is dependent on the product they purchase and the product's associated features. It is only natural that a marketing team becomes heavily involved in this process, as much of what is done here is based on customer feedback.
B. 1. Allred currently earns a $27 profit on each bookcase sold ($108 - $81), which translates into a 25% markup on sales ($27 ÷ $108). The current competitive market price is $120, which means that if Allred maintains the 25% markup, it will earn $30 per unit. The maximum allowable cost is therefore $90 ($120 - $30).
2. Allred can add $9 of modifications ($90 - $81), giving rise to several options. Customers feel most strongly about change A, which can be adopted either by itself or in conjunction with change C ($7.50 + $1.50 = $9.00). Alternatively, changes D and B can be selected, also adding $9 to total cost ($5.00 + $4.00 = $9.00).
C. Allred might use value engineering to study the design and production process of both the bookcase as currently manufactured as well as the proposed new features. The goal is to identify improvements and associated reductions in cost that may allow the company to add previously rejected options.