Assignment Material

Questions

1. 14-1. What are the three major influences on pricing decisions?
2. 14-2. “Relevant costs for pricing decisions are full costs of the product.” Do you agree? Explain.
3. 14-3. Describe four purposes of cost allocation.
4. 14-4. How is activity-based costing useful for pricing decisions?
5. 14-5. Describe two alternative approaches to long-run pricing decisions.
6. 14-6. What is a target cost per unit?
7. 14-7. Describe value engineering and its role in target costing.
8. 14-8. Give two examples of a value-added cost and two examples of a non-value-added cost.
9. 14-9. “It is not important for a company to distinguish between cost incurrence and locked-in costs.” Do you agree? Explain.
10. 14-10. What is cost-plus pricing?
11. 14-11. Describe three alternative cost-plus pricing methods.
12. 14-12. What is life-cycle budgeting?
13. 14-13. What are three benefits of using a product life-cycle reporting format?
14. 14-14. Define price discrimination and give an example.
15. 14-15. Describe peak-load pricing and give an example.

Multiple-Choice Questions

1. 14-16. Which of the following statements regarding price elasticity is incorrect?
   1. a. A product with a perfectly inelastic demand would have the same demand even as prices change.
   2. b. A product with a perfectly inelastic demand would see demand change as prices change.
   3. c. When demand is price elastic, lower prices stimulate demand.
   4. d. When demand is price elastic, higher prices reduce demand.

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Exercises

1. 14-17. VALUE-ADDED, NON-VALUE-ADDED COSTS. The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2020 is as follows:

1. 1. Required
   2. 1. Classify each cost as value-added, non-value-added, or in the gray area between.
   3. 2. For any cost classified in the gray area, assume 60% is value-added and 40% is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added?   
   4. 3. Magill is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 40% and materials and labor costs for servicing machine tools by 5%, (b) working with suppliers to reduce materials-procurement and inspection costs by 20% and materials-handling costs by 30%, and (c) increasing preventive-maintenance costs by 70% to reduce breakdown-maintenance costs by 50%. Calculate the effect of programs (a), (b), and (c) on value-added costs, non-value-added costs, and total costs. Comment briefly.
2. 14-18. TARGET OPERATING INCOME, VALUE-ADDED COSTS, SERVICE COMPANY. Calvert Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2020 is as follows:

1. The percentage of time spent by professional staff on various activities follows:

1. Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently.
   1. Required
   2. 1. How much of the total costs in 2020 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Calvert take to reduce its costs?
   3. 2. What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly.
   4. 3. Suppose Calvert could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs. Calculate Calvert’s operating income for 2020.
   5. 4. Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors. Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain at $15,000. Calculate Calvert’s operating income for 2020.
2. 14-19. TARGET PRICES, TARGET COSTS, ACTIVITY-BASED COSTING. Snappy Tiles is a small distributor of marble tiles. Snappy identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2019:

1. For 2019, Snappy buys 250,000 marble tiles at an average cost of $3 per tile and sells them to retailers at an average price of $4 per tile. Assume Snappy has no fixed costs and no inventories.
   1. Required
   2. 1. Calculate Snappy’s operating income for 2019.
   3. 2. For 2020, retailers are demanding a 5% discount off the 2019 price. Snappy’s suppliers are only willing to give a 4% discount. Snappy expects to sell the same quantity of marble tiles in 2020 as in 2019. If all other costs and cost-driver information remain the same, calculate Snappy’s operating income for 2020.
   4. 3. Suppose further that Snappy decides to make changes in its ordering and receiving-and-storing practices. By placing long-run orders with its key suppliers, Snappy expects to reduce the number of orders to 200 and the cost per order to $25 per order. By redesigning the layout of the warehouse and reconfiguring the crates in which the marble tiles are moved, Snappy expects to reduce the number of loads moved to 3,125 and the cost per load moved to $28. Will Snappy achieve its target operating income of $0.30 per tile in 2020? Show your calculations.
2. 14-20. TARGET COSTS, EFFECT OF PRODUCT-DESIGN CHANGES ON PRODUCT COSTS. Neuro Instruments uses a manufacturing costing system with one direct-cost category (direct materials) and three indirect-cost categories:
   1. a. Setup, production-order, and materials-handling costs that vary with the number of batches
   2. b. Manufacturing-operations costs that vary with machine-hours
   3. c. Costs of engineering changes that vary with the number of engineering changes made
3. In response to competitive pressures at the end of 2019, Neuro Instruments used value-engineering techniques to reduce manufacturing costs. Actual information for 2019 and 2020 is as follows:

1. The management of Neuro Instruments wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit of one of its products, HJ6, by 5%.
2. Actual results for 2019 and 2020 for HJ6 are as follows:

1. 1. Required
   2. 1. Calculate the manufacturing cost per unit of HJ6 in 2019.
   3. 2. Calculate the manufacturing cost per unit of HJ6 in 2020.
   4. 3. Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2020? Explain.
   5. 4. Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2020.
   6. 5. What challenges might managers at Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges?
2. 14-21. TARGET COSTS, EFFECT OF PROCESS-DESIGN CHANGES ON SERVICE COSTS. Sunlight Energy Systems (SES) sells solar heating systems in residential areas of eastern Pennsylvania. A successful sale results in the homeowner purchasing a solar heating system and obtaining rebates, tax credits, and financing for which SES completes all the paperwork. The company has identified three major activities that drive the cost of selling heating systems: identifying new contacts (varies with the number of new contacts); traveling to and between appointments (varies with the number of miles driven); and preparing and filing rebates and tax forms (varies with the number of solar systems sold). Actual costs for each of these activities in 2019 and 2020 are shown below:

1. After experiencing high costs in 2019, SES used value engineering to reduce the cost of selling solar heating systems. Managers at SES want to evaluate whether value engineering has succeeded in reducing the selling cost per sale by the targeted 5% in 2020.
2. Actual results for 2019 and 2020 for SES are as follows:

1. 1. Required
   2. 1. Calculate the cost per sale in 2019.
   3. 2. Calculate the cost per sale in 2020.
   4. 3. Did SES achieve the target cost per sale in 2020? Explain.
   5. 4. What challenges might managers at SES encounter in achieving the target cost and how might they overcome these challenges?
2. 14-22. COST-PLUS TARGET RETURN ON INVESTMENT PRICING. Jason Brady is the managing partner of a business that has just finished building a 60-room motel. Brady anticipates that he will rent these rooms for 15,000 nights next year (or 15,000 room-nights). All rooms are similar and will rent for the same price. Brady estimates the following operating costs for next year:

1. The capital invested in the motel is $1,500,000. The partnership’s target return on investment is 20%. Brady expects demand for rooms to be uniform throughout the year. He plans to price the rooms at full cost plus a markup on full cost to earn the target return on investment.
   1. Required
   2. 1. What price should Brady charge for a room-night? What is the markup as a percentage of the full cost of a room-night?
   3. 2. Brady’s market research indicates that if the price of a room-night determined in requirement 1 is reduced by 10%, the expected number of room-nights Brady could rent would increase by 10%. Should Brady reduce prices by 10%? Show your calculations.
2. 14-23. COST-PLUS, TARGET PRICING, WORKING BACKWARD. KidsPlay, Inc., manufactures and sells table sets. In 2019, it reported the following:

1. 1. Required
   2. 1. What was KidsPlay’s operating income in 2019? What was the full cost per unit? What was the selling price? What was the percentage markup on variable cost to achieve the selling price? What are the total fixed costs?
   3. 2. KidsPlay is considering increasing the annual spending on advertising by $200,000. The managers believe that the investment will translate into a 10% increase in unit sales. Should the company make the investment? Show your calculations.
   4. 3. Refer back to the original data. In 2020, KidsPlay believes that it will be able to sell only 2,700 units at the price calculated in requirement 1. Management has identified $185,000 in fixed cost that can be eliminated. If KidsPlay wants to maintain a 10% markup on full cost, what is the target variable cost per unit?
2. 14-24. LIFE-CYCLE BUDGETING AND COSTING. Teletronics is going to introduce a combination phone/tablet product.
3. Design and testing will take 8 months. Teletronics expects to sell 24,000 units during the first 6 months of sales. Sales over the next 12 months are expected to be less robust at 20,000. And, sales in the final 6 months of the expected life cycle are expected to be 9,000.
4. Teletronics is budgeting for this product as follows:

1. Ignore the time value of money.
   1. Required
   2. 1. If Teletronics prices the phone/tablets at $280 each, how much operating income will the company make over the product’s life cycle? What is the operating income per unit?
   3. 2. Excluding the initial product design costs, what is the operating income in each of the three sales phases of the product’s life cycle, assuming the price stays at $280?
   4. 3. How would you explain the change in budgeted operating income over the product’s life cycle? What other factors does the company need to consider before developing the new combination phone/tablet product?
   5. 4. Teletronics is concerned about the number of units it expects to sell in the first sales phase. The company is considering pricing the phone/tablet at $220 for the first 6 months and then increasing the price to $280 thereafter. With this pricing strategy, Teletronics expects to sell 27,000 units instead of the originally forecast 24,000 units in the first sales phase, and the same number of units for the remaining life cycle. Assuming the same cost structure as given in the problem, which pricing strategy would you recommend? Explain.
2. 14-25. CONSIDERATIONS OTHER THAN COST IN PRICING DECISIONS. Happy Times Hotel operates a 100-room hotel near a busy amusement park. During June, a 30-day month, Happy Times Hotel experiences a 70% occupancy rate from Monday evening through Thursday evening (weeknights). On Friday through Sunday evenings (weekend nights), however, occupancy increases to 90%. (There were 18 weeknights and 12 weekend nights in June.) Happy Times Hotel charges $80 per night for a suite. The company recently hired Gina Davis to manage the hotel to increase the hotel’s profitability. The following information relates to Happy Times Hotel’s costs:

1. Happy Times Hotel offers free breakfast to guests. In June, there are an average of two breakfasts served per room-night on weeknights and four breakfasts served per room-night on weekend nights.
   1. Required
   2. 1. What was Happy Times Hotel’s operating income or loss for the month?
   3. 2. Gina Davis estimates that if Happy Times Hotel decreases the nightly rates to $70, weeknight occupancy will increase to 80%. She also estimates that if the hotel increases the nightly rate on weekend nights to $100, occupancy on those nights will remain at 90%. Would this be a good move for Happy Times Hotel? Show your calculations.
   4. 3. Why would Happy Times Hotel have a $30 price difference between weeknights and weekend nights?
   5. 4. A discount travel clearinghouse has approached Happy Times Hotel with a proposal to offer last-­minute deals on empty rooms on both weeknights and weekend nights. Assuming that there will be an average of three breakfasts served per night per room, what is the minimum price that Happy Times Hotel could accept on the last-minute rooms?

Problems

1. 14-26. COST-PLUS, TARGET PRICING, WORKING BACKWARD. The new chief executive officer (CEO) of Richard Manufacturing has asked for a variety of information about the operations of the firm from last year. The CEO is given the following information, but with some data missing:

1. 1. Required
   2. 1. Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product.
   3. 2. The new CEO has a plan to reduce fixed costs by $250,000 and variable costs by $0.75 per unit while continuing to produce and sell 500,000 units. Using the same markup percentage as in requirement 1, calculate the new selling price.
   4. 3. Assume the CEO institutes the changes in requirement 2 including the new selling price. However, the reduction in variable cost has resulted in lower product quality, resulting in 15% fewer units being sold compared to before the change. Calculate operating income (loss).
   5. 4. What concerns, if any, other than the quality problem described in requirement 3, do you see in implementing the CEO’s plan? Explain briefly.
2. 14-27. VALUE ENGINEERING, TARGET PRICING, AND TARGET COSTS. Westerly Cosmetics manufactures and sells a variety of makeup and beauty products. The company has developed its own patented formula for a new anti-aging cream. The company president wants to make sure the product is priced competitively because its purchase will also likely increase sales of other products. The company anticipates that it will sell 400,000 units of the product in the first year with the following estimated costs:

1. 1. Required
   2. 1. The company believes that it can successfully sell the product for $45 a bottle. The company’s target operating income is 30% of revenue. Calculate the target full cost of producing the 400,000 units. Does the cost estimate meet the company’s requirements? Is value engineering needed?
   3. 2. A component of the direct materials cost requires the nectar of a specific plant in South America. If the company could eliminate this special ingredient, the materials cost would decrease by 25%. However, this would require design changes of $300,000 to engineer a chemical equivalent of the ingredient. Will this design change allow the product to meet its target cost?
   4. 3. The company president does not believe that the formula should be altered for fear it will tarnish the company’s brand. She prefers that the company become more efficient in manufacturing the product. If fixed manufacturing costs can be reduced by $250,000 and variable direct manufacturing labor costs are reduced by $1 per unit, will Westerly achieve its target cost?
   5. 4. Would you recommend the company follow the proposed solution in requirement 2 or requirement 3?
2. 14-28. TARGET SERVICE COSTS, VALUE ENGINEERING, ACTIVITY-BASED COSTING. Lagoon is an amusement park that offers family-friendly entertainment and attractions. The park boasts more than 25 acres of fun. The admission price to enter the park, which includes access to all attractions, is $35. To earn the required rate of return on investment, Lagoon’s target operating income is 35% of total revenues. Lagoon’s managers have identified the major activities that drive the cost of operating the park. The activity cost pools, the cost driver for each activity, and the cost per unit of the cost driver for each pool are shown below:

1. The following information describes the existing operations:
   1. a. The average number of patrons per week is 55,000.
   2. b. The total number of runs across all attractions is 11,340 runs each week.
   3. c. It requires 1,750 hours of litter patrol hours to keep the park clean.
2. In response to competitive pressures and to continue to attract 55,000 patrons per week, Lagoon has decided to lower ticket prices to $33 per patron. To maintain the same level of profits as before, Lagoon is looking to make the following changes to reduce operating costs:
   1. a. Reduce the cost of selling and verifying tickets by $0.35 per ticket sold.
   2. b. Reduce the total number of runs across all attractions by 1,000 runs by reducing the operating hours of some of the attractions that are not very popular.
   3. c. Increase the number of refuse containers in the park at an additional cost of $250 per week. This will decrease the litter patrol hours by 20%.
3. The cost per unit of cost driver for all other activities will remain the same.
   1. Required
   2. 1. Will Lagoon achieve its target operating income of 35% of revenues at ticket prices of $35 per ticket before any operating changes?
   3. 2. After Lagoon reduces ticket prices and makes the changes and improvements described above, will Lagoon achieve its target operating income in dollars calculated in requirement 1? Show your calculations.
   4. 3. What challenges might managers at Lagoon encounter in achieving the target cost? How might they overcome these challenges?
   5. 4. A new carbon tax of $3 per run is proposed to be levied on the energy consumed to operate the attractions. Will Lagoon achieve its target operating income calculated in requirement 1? If not, by how much will Lagoon have to reduce its costs through value engineering to achieve the target operating income calculated in requirement 1?
4. 14-29. COST-PLUS, TARGET RETURN ON INVESTMENT PRICING. ChocAttack makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although ChocAttack makes a variety of candies, the cost differences are insignificant, and the cases all sell for the same price.
5. ChocAttack has a total capital investment of $12,000,000. It expects to produce and sell 450,000 cases of candy next year. ChocAttack requires a 12% target return on investment.
6. Expected costs for next year are shown below:

1. ChocAttack prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.
   1. Required
   2. 1. What is the target operating income?
   3. 2. What is the selling price ChocAttack needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
   4. 3. ChocAttack is considering increasing its selling price to $13 per case. Assuming production and sales decrease by 6%, calculate ChocAttack’s return on investment. Is increasing the selling price a good idea?
2. 14-30. COST-PLUS, TIME AND MATERIALS, ETHICS. V & S Mechanical sells and services plumbing, heating, and air-conditioning systems. V & S’s cost accounting system tracks two cost categories: direct labor and direct materials. V & S uses a time-and-materials pricing system, with direct labor marked up 100% and direct materials marked up 50% to recover indirect costs of support staff, support materials, and shared equipment and tools, and to earn a profit.
3. During a hot summer day, the central air-conditioning in Linda Lowry’s home stops working. V & S technician Tom Dryden arrives at Lowry’s home and inspects the air conditioner. He considers two options: replace the compressor or repair it. The cost information available to Dryden follows:

1. 1. Required
   2. 1. If Dryden presents Lowry with the replace or repair options, what price would he quote for each?
   3. 2. If the two options were equally effective for the 3 years that Lowry intends to live in the home, which option would she choose?
   4. 3. If Dryden’s objective is to maximize profits, which option would he recommend to Lowry? What would be the ethical course of action?
2. 14-31. COST-PLUS AND MARKET-BASED PRICING. Florida Temps, a large labor contractor, supplies contract labor to construction companies. For 2020, Florida Temps has budgeted to supply 82,000 hours of contract labor. Its variable costs are $11 per hour, and its fixed costs are $328,000. Roger Mason, the general manager, has proposed a cost-plus approach for pricing labor at full cost plus 15%.
   1. Required
   2. 1. Calculate the price per hour that Florida Temps should charge based on Mason’s proposal.
   3. 2. The marketing manager supplies the following information on demand levels at different prices:

1. 1. Florida Temps can meet any of these demand levels. Fixed costs will remain unchanged for all the demand levels. On the basis of this additional information, calculate the price per hour that Florida Temps should charge to maximize operating income.
   2. 3. Comment on your answers to requirements 1 and 2. Why are they the same or different?
2. 14-32. COST-PLUS AND MARKET-BASED PRICING. (CMA, adapted) Accurate Laboratories evaluates the reaction of materials to extreme increases in temperature. Much of the company’s early growth was attributable to government contracts, but recent growth has come from expansion into commercial markets. Two types of testing at Accurate are heat testing (HTT) and Arctic-condition testing (ACT). Currently, all of the budgeted operating costs are collected in a single overhead pool. All of the estimated testing-hours are also collected in a single pool. One rate per test-hour is used for both types of testing. This hourly rate is marked up by 35% to recover administrative costs and taxes and to earn a profit.
3. Ethan Poole, Accurate’s controller, believes that there is enough variation in the test procedures and cost structure to establish separate costing rates and billing rates at a 35% markup. He also believes that the inflexible rate structure the company is currently using is inadequate in today’s competitive environment. After analyzing the company data, he has divided operating costs into the following three cost pools:

1. Ethan budgets 116,000 total test-hours for the coming period. Test-hours is also the cost driver for labor and supervision. The budgeted quantity of cost driver for setup and facility costs is 700 setup hours. The budgeted quantity of cost driver for utilities is 8,000 machine-hours.
2. Ethan has estimated that HTT uses 70% of the test-hours, 30% of the setup-hours, and half the machine-hours.
   1. Required
   2. 1. Find the single rate for operating costs based on test-hours, and the hourly billing rate for HTT and ACT.
   3. 2. Find the three activity-based rates for operating costs.
   4. 3. What will the billing rate for HTT and ACT be based on the activity-based costing structure? State the rates in terms of test-hours. Referring to both requirements 1 and 2, which rates make more sense for Accurate?
   5. 4. If Accurate’s competition all charge $18 per hour for ACT, what can Accurate do to stay competitive?
3. 14-33. LIFE-CYCLE COSTING. Life Cycle Metal Recycling and Salvage receives the opportunity to salvage scrap metal and other materials from an old industrial site. The current owners of the site will sign over the site to Life Cycle at no cost. Life Cycle intends to extract scrap metal at the site for 24 months and then will clean up the site, return the land to useable condition, and sell it to a developer. Projected costs associated with the project follow:

1. Ignore the time value of money.
   1. Required
   2. 1. Assuming that Life Cycle expects to salvage 30,000 tons of metal from the site, what is the total project life-cycle cost?
   3. 2. Suppose Life Cycle can sell the metal for $80 per ton and wants to earn a profit (before taxes) of $30 per ton. At what price must Life Cycle sell the land at the end of the project to achieve its target profit per ton?
   4. 3. Now suppose Life Cycle can only sell the metal for $70 per ton and the land at $141,000 less than what you calculated in requirement 2. If Life Cycle wanted to maintain the same markup percentage on total project life-cycle cost as in requirement 2, by how much would the company have to reduce its total project life-cycle cost?
2. 14-34. AIRLINE PRICING, CONSIDERATIONS OTHER THAN COST IN PRICING. Air Americo is about to introduce a daily round-trip flight from New York to Los Angeles and is determining how to price its round-trip tickets.
3. The market research group at Air Americo segments the market into business and pleasure travelers. It provides the following information on the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket, including the commission paid to travel agents:

1. Pleasure travelers start their travel during one week, spend at least 1 weekend at their destination, and return the following week or thereafter. Business travelers usually start and complete their travel within the same work week. They do not stay over weekends.
2. Assume that round-trip fuel costs are fixed costs of $24,500 and that fixed costs allocated to the round-trip flight for airplane-lease costs, ground services, and flight-crew salaries total $188,000.
   1. Required
   2. 1. If you could charge different prices to business travelers and pleasure travelers, would you? Show your computations.
   3. 2. Explain the key factor (or factors) for your answer in requirement 1.
   4. 3. How might Air Americo implement price discrimination? That is, what plan could the airline formulate so that business travelers and pleasure travelers each pay the price the airline desires?
3. 14-35. PRICING PRODUCTS USING THE TARGET-COSTING APPROACH. ProDry is entering the professional hair dryer market. Research shows that their customers wish to pay $310 or less for each dryer. Cost accountants at the manufacturer have collected the following information:

1. 1. Required
   2. 1. What is the estimated cost per unit for ProDry?
   3. 2. What is the range of prices that ProDry could charge to make a profit?
   4. 3. Assume that ProDry’s target operating income per unit is $165. What is the target cost for the dryer?
   5. 4. What can the company do to achieve its target cost calculated in requirement 3?
   6. 5. Should the target cost calculated in requirement 3 include all costs (direct, and variable and fixed overhead)? Why or why not?
2. 14-36. PRICING PRODUCTS USING THE COST-PLUS APPROACH (CONTINUED FROM 14-35)
3. The management of ProDry is considering use of the cost-plus approach rather than the target-cost ­approach used in 14-35. Refer to the information in 14-35.
   1. Required
   2. 1. Do you think that it’s a good idea for ProDry to use the cost-plus approach to price the hair dryer?
   3. 2. What strategies could ProDry’s management use to make a profit if the company insisted on using the cost-plus approach to price the hair dryer?
4. 14-37. VALUE ENGINEERING, TARGET PRICING, AND LOCKED-IN COSTS. Sylvan Creations designs, manufactures, and sells modern wood sculptures. Sandra Johnson is an artist for the company. Johnson has spent much of the past month working on the design of an intricate abstract piece. Jim Chase, product development manager, likes the design. However, he wants to make sure that the sculpture can be priced competitively. Ellen Cooper, Sylvan’s cost accountant, presents Chase with the following cost data for the expected production of 75 sculptures:

1. 1. Required
   2. 1. Chase thinks that Sylvan Creations can successfully market each piece for $3,000. To earn the required return on capital, the company’s target operating income per unit is 20% of target price. Calculate the target full cost per unit of producing the 75 sculptures. Does the cost estimate Cooper developed meet Sylvan’s requirements? Is value engineering needed? What is the total target operating income for the 75 sculptures?
   3. 2. Chase believes that competition will require Sylvan to reduce the price of the sculpture to $2,800. Rather than using the highest-grade wood available, Sylvan could use standard grade wood and lower the cost of direct materials by 25%. This redesign will require an additional $1,500 of design cost. Will this design change allow Sylvan to earn its total target operating income on the 75 sculptures? Is the cost of wood a locked-in cost?
   4. 3. If the price of the sculpture is $2,800, what is the total amount Sylvan can spend on direct materials for the 75 sculptures to earn the total target operating income calculated in requirement 1? What is the target cost per sculpture?
   5. 4. What challenges might managers at Sylvan Creations encounter in achieving the target cost and how might they overcome these challenges?