P16.6 (LO 3, 4), AN Daniel and Darnell are considering offering a doggy daycare service. After some research, Daniel and Darnell found several pet daycare facilities in their area; but they were expensive! Further, the facili- ties were sterile and didn't provide for a "homey" or fun environment for their pets. Daniel and Damell felt they could easily solve this problem. Daniel's home would be the location for their business since it already had a fenced-in yard and is located two blocks from a dog park. Estimated costs for building an outdoor shelter, plus other licensing and business start-up costs, are as follows. Shelter (depreciated over 7 years) Licensing & other annual costs $500 per year S750 per year Hourly wage for hired labor; planned for only 200 hours per year $15 per hour Variable costs for food $15 per day per dog Estimated volume of dogs per day (open for business 50 weeks per year; 12 per day average length of stay 8 hours per day) Required a. Which pricing strategy, target costing or cost-plus, would be more appropriate for this company, and why?
P16.6 (LO 3, 4), AN Daniel and Darnell are considering offering a doggy daycare service. After some research, Daniel and Darnell found several pet daycare facilities in their area; but they were expensive! Further, the facili- ties were sterile and didn't provide for a "homey" or fun environment for their pets. Daniel and Damell felt they could easily solve this problem. Daniel's home would be the location for their business since it already had a fenced-in yard and is located two blocks from a dog park. Estimated costs for building an outdoor shelter, plus other licensing and business start-up costs, are as follows. Shelter (depreciated over 7 years) Licensing & other annual costs $500 per year S750 per year Hourly wage for hired labor; planned for only 200 hours per year $15 per hour Variable costs for food $15 per day per dog Estimated volume of dogs per day (open for business 50 weeks per year; 12 per day average length of stay 8 hours per day) Required a. Which pricing strategy, target costing or cost-plus, would be more appropriate for this company, and why?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
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Transcribed Image Text:P16.6 (LO 3, 4), AN Daniel and Darnell are considering offering a doggy daycare service. After some research,
Daniel and Darnell found several pet daycare facilities in their area; but they were expensive! Further, the facili-
ties were sterile and didn't provide for a "homey" or fun environment for their pets. Daniel and Damell felt they
could easily solve this problem.
Daniel's home would be the location for their business since it already had a fenced-in yard a nd is located
two blocks from a dog park. Estimated costs for building an outdoor shelter, plus other licensing and business
start-up costs, are as follows.
Shelter (depreciated over 7 years)
$500 per year
Licensing & other annual costs
$750 per year
$15 per hour
$15 per day per dog
Hourly wage for hired labor; planned for only 200 hours per year
Variable costs for food
Estimated volume of dogs per day (open for business 50 weeks per year; 12 per day
average length of stay 8 hours per day)
Required
a. Which pricing strategy, target costing or cost-plus, would be more appropriate for this company, and why?
b. If the company employs a target costing approach, assume that the going rate for doggy dayca re is $10 per
hour. The two friends require a 25% return on their invested assets, which total $600,000 (including Dan-
iel's home). How would the target cost and estimated cost per dog hour change if a more accurate estimate
of volume is just 9 dogs per day?
c. If the company employs a cost-plus markup of 30%, assuming the original volume of 12 dogs per day, what
will be the selling price per dog hour?
d. After conducting these different analyses, which pricing strategy seems more appropriate for Daniel and
Darnell's business? Why?
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