E11-3
Mucky Duck makes swimsuits and sells these suits directly to
retailers. Although Mucky Duck has a variety of suits, it does not make the
All-Body suit used by highly skilled swimmers. The market research department
believes that a strong market exists for this type of suit. The department
indicates that the All-Body suit would sell for approximately $110. Given its
experience, Mucky Duck believes the All-Body suit would have the following
manufacturing costs.
Direct
materials
|
$ 25
|
Direct
labor
|
30
|
Manufacturing
overhead
|
45
|
Total
costs
|
$100
|
Instructions
(a)
Assume that Mucky Duck uses cost-plus pricing, setting the selling price 25%
above its costs. (1) What would be the price charged for the All-Body swimsuit?
(2) Under what circumstances might Mucky Duck consider manufacturing the All-Body
swimsuit given this approach?
(b)
Assume that Mucky Duck uses target costing. What is the price that Mucky Duck
would charge the retailer for the All-Body swimsuit?
(c)
What is the highest acceptable manufacturing cost Mucky Duck would be willing to
incur to produce the All-Body swimsuit, if it desired a profit of $25 per unit?
(Assume target costing.)
SOLUTION PREVIEW (The Solution is done in EXCEL TEMPLATE)
Week 7 Template
EXERCISE
11-3
(a)
(1)
|
= ($100 + [$100 x 25%])
= $125.
|
(2)
|
If the company can cover its variable costs it might want to
sell at the $110 level.
|
File name: E11-3-Mucky-Duck.xls File type: application/vnd.ms-excel PRICE $4
