Question

Harry's Co. 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 Harry's Co. employs a target pricing strategy? A. Raise prices under the assumption that the company's competitors will follow suit. B. Return to the old allocation method, which produces a lower amount of estimated cost. "C.Use less expensive materials to make the product. Target advertising to high-income customers.

Answer 1

Option C, using less expensive materials to reduce production costs, is the most reasonable strategy for Harry's Co. when faced with a cost of production that is higher than the selling price under a target pricing strategy. Other options either don't address the cost issue effectively or are unfeasible due to market competition.

Step-by-step explanation:

When implementing a target pricing strategy, Harry's Co. faces a challenge: the cost of producing one of its products exceeds its selling price, and raising prices isn't an option due to competition. Among the suggested options, the most reasonable is to use less expensive materials to make the product (Option C). This strategy involves reducing production costs to meet the target price. Returning to the old allocation method (Option B) would not be effective in the real cost management or provide a viable long-term solution. Raising prices (Option A) is not feasible in a competitive market, and target advertising to high-income customers does not directly address the cost concern.

Cost Management Strategies

With the current cost of production at $5.7 and the selling price at $3.5, the company is operating at a loss. Shifting to less expensive materials could reduce the average cost, enabling the company to approach or even reach a break-even point without having to raise the price. However, this decision must be balanced with the potential impact on quality and customer perception. The business may also explore other cost-saving measures, such as process improvements or overhead cost reduction, to achieve its target cost.

Answer 2

C. Return to the old allocation method, which produces a lower amount of estimated cost.

Step-by-step explanation:

Base on the scenario been described in the question, after Harry's co implemented an activity base costing system, this is 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, also, they can not increase price due to the competition it will better for them to return to the old allocation method, which produces a lower amount of estimated cost. That will be the best thing to do