Problem:
Green Cheese Company has developed a new cheese slicer called Wow Slicer. The company plans to sell this slicer through its catalog, which it issues monthly. Given market research, Green believes that it can charge $19.00 for the Wow Slicer. Prototypes of the Wow Slicer, however, are costing $28. By using cheaper materials and gaining efficiencies in mass production, Green believes it can reduce Wow Slicer's cost substantially. Green wishes to earn a return of 28% of the selling price.
Green also makes cheese presses and sells these presses directly to retailers. Although Green has a variety of presses, it does not make the Superduper press used by highly skilled cheese makers. The market research department believes that a strong market exists for this type of press. The department indicates that the Superduper press would sell for approximately $101. Given its experience, Green believes the Superduper press would have the following manufacturing costs.
Direct materials $26
Direct labor 28
Manufacturing overhead 44
Total costs $98
Instructions:
Compute the target cost for the Wow Slicer.
Assume that Green uses cost-plus pricing, setting the selling price 19% above its costs. What would be the price charged for the Superduper press?
Assume that Green uses target costing. What is the price that Green would charge the retailer for the Superduper press?
What is the highest acceptable manufacturing cost Green would be willing to incur to produce the Superduper press, if it desired a profit of $16 per unit? (Assume target costing).