Question

Silicon Technologies, currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $230. Management believes it must lower the price to $230 to compete in the market for 17" monitors. Silicon believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Silicon's sales are currently 5,000 monitors per year. 1. What is the target cost if the target operating income is 25% of sales? A) $230.00 B) $207.00 C) $172.50 D) $115.00 2. What is the change in operating income if marketing manager is correct and only the sales price is changed? A) $200,000 B) $190,000 C) $(190,000) D) $(200,000)

Answer 1

Answer:

Option C-$172.50

Option C,($190,000)is correct

Explanation:

Target cost=competitive market price-target operating profit

competitive market price is $230

target operating profit is 25% of selling price=$230*25%=$57.50

target cost=$230-$57.50=$172.50

Option C is correct as a result of the above computation

Current operating income =($270-$210)*5000=$300,000

new operating income=($230-$210)*(5000*110%)

                                      =$20*5500=$110,000

The new operating is $110,000 from $300,000 recorded earlier,in a nutshell ,the operating income would reduce by $190,000($300,000-$110,000)

Option C is the correct answer