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ACCT Question 6

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Answer the following thoroughly.;The following conversation took place between Dean Lancaster, vice president of marketing, and Dina Conaway, controller of Redwood Computer Company;Dean: I am really excited about our new computer coming out. I think it will be a real market success.;Dina: I?m really glad you think so. I know that our success will be determined by our price. If our price is too high, our competitors will be the ones with the market success.;Dean: Don?t worry about it. We?ll just mark our product cost up by 25% and it will all work out. I know we?ll make money at those markups. By the way, what does the estimated product cost look like?;Dina: Well, there?s the rub. The product cost looks as if it?s going to come in at around $1,000. With a 25% markup, that will give us a selling price of $1,250.;Dean: I see your concern. That?s a little high. Our research indicates that com-puter prices are dropping and that this type of computer should be selling for around $900 when we release it to the market.;Dina: I?m not sure what to do.;Dean: Let me see if I can help. How much of the $1,000 is fixed cost?;Dina: About $300.;Dean: There you go. The fixed cost is sunk. We don?t need to consider it in our pricing decision. If we reduce the product cost by $300, the new price with a 25% markup would be right at $875. Boy, I was really worried for a minute there. I knew something wasn?t right.;a. If you were Dina, how would you respond to Dean?s solution to the pricing problem?;b. How might target costing be used to help solve this pricing dilemma?

 

Paper#76596 | Written in 18-Jul-2015

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