Suppose that IKEA the Swedish retailer, is developing a new chair targeted to se

Question

Suppose that IKEA the Swedish retailer, is developing a new chair targeted to sell for less than $100 and that it is considering the two production alternatives that follow. Rank the alternatives assuming that the company's minimum desired profit is 30 percent over total production costs.

Alternative A

Direct material costs $35

Direct Labor cost $1 hour at $12 per hour

Overhead costs 200 percent of direct labor costs

Alternative B

Direct materials costs $20

Direct Labor costs $2 hours at $8 per hour

Overhead costs $2 per dollar of direct materials

Explanation / Answer

Total production cost in

Alternative A: $71

Alternative B: $76

Profit required

Alternative A: $21.30

Alternative B: $22.80

Targeted Sale price

Alternative A: $92.30

Alternative B: $98.80

Ranking is to be done on the basis of total production cost which also help the customer as well as the manufacturer in demand

So Rank are

Rank I : Alternative A

Rank II: Alternative B

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