Chastain Company Recently Implemented an Activity-Based-Costing System

question 55

Multiple Choice

Chastain Company recently implemented an activity-based-costing system.As a result of the ABC allocations,the cost of one of the company's products was determined to be above its current selling price.Due to competition,the company is unable to raise the price of this product.Which of the following options is most reasonable,assuming Chastain employs a target costing pricing strategy?

• A) Use less expensive materials to make the product.
• B) Raise prices under the assumption that the company's competitors will follow suit.
• C) Target advertising to high income customers.
• D) Return to the old allocation method which produces a lower amount of estimated cost.

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Definitions:

Operating Income

Operating Income is the amount of profit realized from a business's operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold.

Optimal Capital Structure

The optimal combination of equity and debt financing that reduces the firm's capital costs to the minimum while maximizing its value.

Maximizes Value

Maximizes Value refers to the financial management principle where decisions are made to increase the worth of a company or asset to its shareholders or owners.

Financial Distress Costs

Expenses incurred by a company when it is struggling to meet its financial obligations, which may include bankruptcy costs, restructuring costs, and inefficiencies.