Mucky Duck makes swimsuits and sells them 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. It says 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 labour.........................................30
Manufacturing overhead...........................45
Total costs.........................................$100
Instructions
(a) Assume that Mucky Duck uses cost-plus pricing, and sets the price 25% above the product's 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?
3. What is the highest acceptable manufacturing cost Mucky Duck would be willing to incur to produce the all-body swimsuit?
(b) Assume that Mucky Duck uses target costing. What is the price that Mucky Duck would charge the retailer for the all-body swimsuit?