For Many Years, Orbit Corporation Has Used a Straightforward Cost-Plus

question 9

Essay

For many years, Orbit Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 20% of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing.
An example of Orbit's woes is typified by item no. 710, which has the following unit-cost characteristics: direct materials, $50; direct labor, $90; manufacturing overhead, $40; and selling and administrative expenses, $20. The going market price for an identical product of identical quality is $210, which is below what Orbit is charging.
Required:
A. Contrast cost-plus pricing and target costing.
B. What is Orbit's current selling price for item no. 710?
C. If Orbit used target costing for item no. 710, what must happen to costs if the company desired to meet market prices and maintain its current rate of profit on sales? By how much?

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Definitions:

Fruiting Body

The spore-producing structure of fungi and other plants which is usually seen above ground.

Gametangium

A specialized organ or cell in which gametes are formed in algae, fungi, and plants.

Septa

Dividing walls or partitions between two spaces or cavities, often found in the body or in the structure of certain organisms.

Coenocytes

A type of cell that contains multiple nuclei within a shared cytoplasm, without dividing into individual cells.