Question

Block Island TV currently sells large televisions for $ 380. It has costs of $ 310. A competitor is bringing a new large television to market that will sell for $ 340. Management believes it must lower the price to $ 340 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 20​%, even with a new competitor in the market. Block Island TV sales are currently 150,000 televisions per year.
What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)

Answer 1

Answer:

$281.67

Explanation:

Data provided in the question:

Current selling price of large TV = $380

Cost of Large TV = $310

Selling price of new TV = $340

Increase in sales = 20% = 0.20

Current sales = $150,000

Now,

Expected sales after reducing the price = Current sales + Increase in sales

= 150,000 + ( 0.20 × 150,000 )

= 150,000 + 30,000

= 180,000

Target Operating income = ( $380 - $310 ) × current sales

= $70 × 150,000

= $10,500,000

New operating cost per unit

= Target Operating income ÷ Expected sales after reducing the price

= $10,500,000 ÷  180,000

or

New operating cost per unit = $58.33

Target Cost

= Price after reduction - New operating cost per unit

= $340 - $58.33

= $281.67