Question

Rick's Co. currently sells boats for $1,000. it has costs of $600. A competitor is bringing a new boat to the market that will sell for $800. to compete in the market, management believes ot must lower the price to $800. the marketing department believes rhag the new price will cause sales to increase by 20% even with a new competitor in the market. the companys current sales of boats per year are 500 units.

a. what is the target cost for the new target price if the target operating income is 20% of the sales?

b. what is the change in operating imcome if marketing department is correct and only the sales price is changed?

c. what is the target cost if the company wants to maintain its same income level, and marketimg department is correct?

Answer 1

A)

New sales = $800 * (500+20%) = $480,000

Expected profit = $480,000 * 20% = $96,000

Target cost = Sales - profit = $384,000

Target cost per unit = $384,000 / 600 = $640

B)

If marketing department is correct.

New Sales = $480,000 (800*600)

Cost = $360,000 ( 600 *600)

Net Income = $120,000

Current Income

= Sales volume * (Sales value - Variable cost)

= 500 * (1000 - 600)

= $200,000

Thus, the operating Income would deceased by $80,000 ($200,000 - $120,000)

C)

Estimated sales assuming marketing department is correct: $480,000 ( $800 * 600 units)

Current profit level as calculated in B) above = $200,000

Target cost: $480,000 - $200,000 = $280,000

Target price per unit: = $280,000 / 600

=$466.67 (rounded off)