Question

Cheng builds replica miniature cabinets. His costs for each cabinet are $32 each. A consultant tells Cheng that the average margin in his industry is 54%. Cheng currently sells the cabinets for $43, but thinks he should consider using the industry average margin as his target goal.
(a) What is Cheng's current dollar margin per unit?
(b) What should Cheng's Selling Price be to achieve his target margin?
(c) If Cheng decides to sell to a retailer who earns a retail margin of 10%, what would be the final price to consumers if Cheng changes his price to the retailer to reflect his target margin?
(d) If the retailer decides she would rather have a $10 margin what will be the final retail price to the consumer presuming Cheng changes his price to reflect his new target margin?

Answer 1

Answer:

A) Contribution margin= $9

B) P=$69.56

C) P= $35.56

D) P= $42

Explanation:

Giving the following information:

Unitary variable cost= $32 each.

The average margin industry is 54%.

Selling proice= $43

A) Contribution margin= Price - unitary variable cost= 43-32= $9

B) %Margin= (P-CVu)/P

0.54= (P-32)/P

0.54P=P-32

0.46P=32

P=32/0.46= $69.56

C) 0.10=(P-32)/P

P= $35.56

D) P=32+10= $42