Suppose that IKEA the Swedish retailer, is developing a new chair targeted to se
ID: 2371756 • Letter: S
Question
Suppose that IKEA the Swedish retailer, is developing a new chair targeted to sell for less than $100 and that it is considering the two production alternatives that follow. Rank the alternatives assuming that the company's minimum desired profit is 30 percent over total production costs.
Alternative A
Direct material costs $35
Direct Labor cost $1 hour at $12 per hour
Overhead costs 200 percent of direct labor costs
Alternative B
Direct materials costs $20
Direct Labor costs $2 hours at $8 per hour
Overhead costs $2 per dollar of direct materials
Explanation / Answer
Total production cost in
Alternative A: $71
Alternative B: $76
Profit required
Alternative A: $21.30
Alternative B: $22.80
Targeted Sale price
Alternative A: $92.30
Alternative B: $98.80
Ranking is to be done on the basis of total production cost which also help the customer as well as the manufacturer in demand
So Rank are
Rank I : Alternative A
Rank II: Alternative B