King Bathroom Fixtures (KBF) makes faucets, basins, and so on primarily for home use and sold through major retail chains. The design team at KBF has been working on a unique design to provide reasonable pressure while still conserving water. The market is quite competitive and KBF analysts believe that the fixture could sell for a unit price of $36.40. The cost accounting team
King Bathroom Fixtures (KBF) makes faucets, basins, and so on primarily for home use and sold through major retail chains. The design team at KBF has been working on a unique design to provide reasonable pressure while still conserving water. The market is quite competitive and KBF analysts believe that the fixture could sell for a unit price of $36.40.
The cost accounting team at KBF has estimated the following
| Direct materials | $ 19.75 |
|---|---|
| Direct labor | 5.90 |
| Manufacturing overhead | 8.85 |
| Total | $ 34.50 |
An operating profit of 12 percent of manufacturing costs is required for all new products at KBF without the explicit consent of the top executive team. At KBF, operating margin is defined as revenues less manufacturing costs, all divided by manufacturing costs).
Required:
a. Suppose KBF uses cost-plus pricing, setting the price equal to manufacturing costs plus 12 percent of manufacturing costs. What price should it charge for the fixture?
b. Suppose KBF uses target costing. What is the highest acceptable manufacturing cost at which KBF would be willing to produce the fixture?
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