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 $74 each.

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

Direct materials	$	38
Direct labor		38
Manufacturing overhead		22
Total	$	98

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?

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

Answer 1