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Hannon All-Body

Price: $1.99


Hannon Company makes swimsuits and sells these suits directly to retailers. Although
Hannon 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
$100. Given its experience, Hannon believes the All-Body suit would have the following
manufacturing costs.


Direct materials   25
Direct labor   30
Manufacturing overhead   45
Total costs   100

Instructions
(a) Assume that Hannon uses cost-plus pricing, setting the selling price 20% above its
costs. (1) What would be the price charged for the All-Body swimsuit? (2) Under what
circumstances might Hannon consider manufacturing the All-Body swimsuit given
this approach?
(b) Assume that Hannon uses target costing. What is the price that Hannon would charge
the retailer for the All-Body swimsuit?
(c) What is the highest acceptable manufacturing cost Hannon would be willing to incur
to produce the All-Body swimsuit, if it desired a profi t of $20 per unit? (Assume target
costing.)

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