Polar Industries makes refrigerators. Polar’s management wantsto market refrigerators to students in dorm rooms and smallapartments by making a compact refrigerator. The competition, ledby Walmart, prices small refrigerators at $68 each.

The production manager at Polar Industries estimates that thesmall refrigerator could be produced for the followingmanufacturing costs.

Direct materials	$	35
Direct labor		32
Manufacturing overhead		19
Total	$	86

Polar’s management wants to make an operating margin of 10percent (operating margin equals revenues minus manufacturingcosts).

Required:

a. Suppose Polar uses cost-plus pricing,setting the price to manufacturing costs plus 10 percent ofmanufacturing costs. What price should it charge for therefrigerator?

86 * .1 = 8.6

86+8.6= 94.6

b. Suppose Polar uses target costing. What isthe highest acceptable manufacturing cost for which Polar would bewilling to produce the small refrigerator?

68/1.1=61.818

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