Schopp Company makes swimsuits and sells these suits directly to retailers.
Although Schopp 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, Schopp 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 Schopp 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 Schopp consider manufacturing the All-Body swimsuit given this approach?
(b) Assume that Schopp uses target costing. What is the price that Schopp would charge the retailer for the All-Body swimsuit?
(c) What is the highest acceptable manufacturing cost Schopp would be willing to incur to produce the All-Body swimsuit, if it desired a profit of $25 per unit? (Assume target costing.)