Advanced Managerial Accounting
Home Work Questions
CF is the new controller for the consumer division of ABC company. In the past five years, ABC’s earnings have grown by at least 15% annually, with the consumer division’s earnings growing by over 20% annually over the same time-period. In the 4th quarter of the current year, however, it is projected that consumer’s income will grow by 8% and ABC’s will grow by 10%. ML, consumer division’s president, wants CF to take some of the following “end of the year” actions in order to improve consumer’s reported earnings. Under the previous controller, these types of actions were more or less taken as acceptable practices.
1) Deferring routine monthly maintenance on …show more content…
It can help them better price products and services to recognize the pre and post costs. Another benefit is that by explicitly considering these costs in the planning phases, steps can be taken to minimize the costs (by not locking them in).
The main potential problem is estimating the costs, especially post-production costs, which are likely to be incurred far into the future. Another potential problem is that firms may become paralyzed because they are “worried” about costs that may or not be incurred in the future.
b) What is target pricing? Under what circumstances can it be most useful? What are some potential problems with this approach?
Target pricing is a market-based approach to pricing where a firm asks potential customers of a product or service how much they would be willing to pay for the product or service. This is the target price. Then, the firm determines the maximum amount it can pay to produce the good or service in order to make an acceptable profit margin. This is the target cost of the good or service. If the firm needs to reduce the cost to product in order to get down to the target cost, it could use value engineering. Value engineering is a process where an organization attempts to reduce cost throughout the value chain without reducing the value provided by the product or service.
Target pricing is most useful when introducing new products or services. It is less useful with existing products and services because it may be