E8-3 Leno Company makes swimsuits and sells these suits directly to retailers. A
ID: 2564617 • Letter: E
Question
E8-3 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 swim- mers. 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 $100. Given its experience, Leno believes the All-Body suit would have the following manufac- turing costs. Direct materials Direct labor Manufacturing overhead Total costs $ 25 30 45 $100 Instructions (a) Assume that Leno 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 cir cumstances might Leno consider manufacturing the All-Body swimsuit given this approach? (b) Assume that Leno uses target costing. What is the price that Leno would charge the retailer for the All-Body swimsuit? (c) 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 $25 per unit? (Assume target costing.)Explanation / Answer
(a) Assume that LENO uses cost-plus pricing, setting the selling price 25% above its costs. (1) What would be the price charged for the suit? (2) Under what circumstances might LENO consider manufacturing the All-Body suit given this approach?
(1) In this case the selling price would be $125 ($100 + [$100 X 25%]). The problem with the $125 is that it is unlikely that Leno will be able to sell any All-Body suits at that price. Market research seems to indicate that it will sell for only $100.
(2) One way that Leno might consider manufacturing the All-Body swimsuit is if it has excess capacity and therefore manufacturing the All-Body will not affect fixed costs. Thus if the company can cover its variable costs it might want to sell at the $100 level.
(b) Assume that LENO uses target costing. What is the price that LENO would charge the retailer for the All-Body suit?
In this case the amount would be the selling price of $100.
(c) What is the highest acceptable cost LENO would be willing to incur to produce the suit at a profit of $25 per unit?
The highest acceptable cost would be the target cost. The target cost is $75 as shown below:
Target cost = Market price – Desired profit
$100 - $25 = $75
(a) Total cost per unit:
Per Unit
Direct materials.............................................................................
Direct labor....................................................................................
Variable manufacturing overhead............................................
Fixed manufacturing overhead
($3,000,000/500,000)................................................................
Variable selling and administrative expenses.......................
Fixed selling and administrative expenses
($1,500,000/500,000)................................................................
$7
11
15
6
14
3
$56
(b) Desired ROI per unit = (25% X $28,000,000)/500,000 = $14
(c) Markup percentage using total cost per unit:
$14
=
25%
$56
(d) Target selling price = $56 + ($56 X 25%) = $70
Per Unit
Direct materials.............................................................................
Direct labor....................................................................................
Variable manufacturing overhead............................................
Fixed manufacturing overhead
($3,000,000/500,000)................................................................
Variable selling and administrative expenses.......................
Fixed selling and administrative expenses
($1,500,000/500,000)................................................................
$7
11
15
6
14
3
$56
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.