E11-3:

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

Instructions:

(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.)