Leno Company makes swimsuits and sells these suits directly to retailers. Althou

Question

Leno Company makes swimsuits and sells these suits directly to retailers. Although Leno 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 $115. Given its experience, Leno believes the All-Body suit would have the following manufacturing costs.

Direct materials $30

Direct labor 35

Manufacturing overhead 45

Total costs $110

What is the highest acceptable manufacturing cost Leno would be willing to incur to produce the All-Body swimsuit, if it desired a profit of $23 per unit? (Assume target costing.)

Explanation / Answer

selling price = $ 115

Let the highest acceptable cost = $ x

Desired profit = $ 23

We can say that:

COST + PROFIT = SELLING PRICE

X+23= 115

X= 115-23

X= $92

So the highest acceptable manufacturing cost = $ 92

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