Mucky Duck makes swimsuits and sells these suits directly to retailers. Although
ID: 2384872 • Letter: M
Question
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
Each Section should be COMPLETED with correct answers to get an A+ for this Cramster Question. These are the Instructions; accurately answer to get the Maximum Karma Pts.
(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)
Answer the instructions (A), 1,2 - (b) and (c)
Explanation / Answer
(a) Assume that MD uses cost-plus pricing, setting the selling price 25% above its costs. (1) What would be the price charged for the suit? (2) Under what circumstances might MD consider manufacturing the All-Body suit given this approach?
(1) In this case the selling price would be $125 ($100 + [$100 X 25%]). The problem with the $125 is that it is unlikely that Mucky Duck will be able to sell any All-Body suits at that price. Market research seems to indicate that it will sell for only $110.
(2) One way that Mucky Duck might consider manufacturing the All-Body swimsuit is if it has excess capacity and therefore manufacturing the All-Body will not affect fixed costs. Thus if the company can cover its variable costs it might want to sell at the $110 level.
(b) Assume that MD uses target costing. What is the price that MD would charge the retailer for the All-Body suit?
In this case the amount would be the selling price of $110.
(c) What is the highest acceptable cost MD would be willing to incur to produce the suit at a profit of $25 per unit?
The highest acceptable cost would be the target cost. The target cost is $85 as shown below:
Target cost = Market price – Desired profit
$110 - $25 = $85
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