Problem:
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
Q1. 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?
Q2. Assume that Mucky Duck uses target costing. What is the price that Mucky Duck would charge the retailer for the All-Body swimsuit?
Q3. 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?