An athletic equipment company wants to make a new exercise bicycle wit

QUESTION

An athletic equipment company wants to make a new exercise bicycle with a speedometer, an odometer, a heart-rate monitor, and a small television. Which of the following describes target costing of that bicycle?

A) The company will find out how many similar products already exist and the price of those products. The company will learn which company is dominant in the market and get an idea of customer loyalty to competitors. Then it will set its price.
B) The company will figure out the production cost of the bicycle and then factor in its desired profit before setting the price.
C) The company will research what consumers would pay for such a bicycle and what the production cost of the bicycle would be. Then it will factor in its desired profit and price the product.
D) The company will set a price for the product that is higher than it needs to be and then hold regular sales to sell the product for a lower price.
E) The company will set a price that will cover its production costs and make a profit, and set the price with precise numbers to give the effect of a bargain price.

ANSWER

Answer: C
Explanation: C) In target costing, a company starts with the price it wants to charge, figures out the profit margin it wants, then determines what the costs must be to produce the product to meet the desired price and profit goals.