Question

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

The production manager at Polar Industries estimates that the small refrigerator could be produced for the following manufacturing costs.

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

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

Required:

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

86 * .1 = 8.6

86+8.6= 94.6

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

68/1.1=61.818

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Answer 1

(A) What price should it charge for the refrigerator?

Ans:

=Cost +10% of manufacturing cost

= $86 + ($86×10%)

=$86 + $ 8.6

= $ 94.6

(B) What is the highest acceptable manufacturing cost for which. Polar would be willing to produce the small refrigerator?

Ans:

= Price ÷(100% + 10%)

=$ 68 ÷ 110%

= $61.818