Leno Company makes swimsuits and sells these suits directly to retailers. Although Leno 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 $100. Given its experience, Leno believes the All-Body suit would have the following manufacturing costs.
Direct materials .............................. $ 20
Direct labor .................................. 30
Manufacturing overhead .................... 45
Total costs ....................................... $100
Instructions
(a) Assume that Leno 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 Leno consider manufacturing the All-Body swimsuit given this approach?
(b) Assume that Leno uses target costing. What is the price that Leno would charge the retailer for the All-Body swimsuit?
(c) What is the highest acceptable manufacturing cost Leno would be willing to incur to produce the All-Body swimsuit, if it desired a profit of $25 per unit? (Assume target costing.)