E11-3 Mucky Duck makes swimsuits and sells these suits directly to retailers. Al
ID: 2354007 • Letter: E
Question
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.) (Kimmel 511-512)
E11-11 Allied Company
Explanation / Answer
(a) Assuming that the Small Motor Division has excess capacity, compute the minimum
acceptable price for the transfer of small motor LN233 to the Household Division.
Minimum transfer price = Variable cost + opportunity cost
Since the Small Motor Division has excess capacity, the minimum transfer price is the variable cost of $8.00 per unit.
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(b) Assuming that the Small Motor Division does not have excess capacity, compute the
minimum acceptable price for the transfer of the small motor to the Household Division.
Given no excess capacity, the minimum transfer price is $30, which is its variable cost plus the lost contribution margin.
= $8 + ($30-$8)
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(c) Explain why the level of capacity in the Small Motor Division has an effect on the transfer price.
The level of capacity plays a significant role in determining the appropriate transfer price;
because if a division has no excess capacity, why should it sell its product below a selling price it can obtain in an outside market.
if it has excess capacity, as long as it receives more than its variable cost, it has a net gain.
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