Marcon Tech Corp., currently sells radios for $7,000. It has costs of $5,400. A
ID: 2480878 • Letter: M
Question
Marcon Tech Corp., currently sells radios for $7,000. It has costs of $5,400. A competitor is bringing a new radio to market that will sell for $5,850. Management believes it must lower the price to $5,850 to compete in the market for radios. The marketing department believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Marcon's sales are currently 1,000 radios per year.
Required:
What is the target cost for the new target price if target operating income is 20% of sales?
What is the change in operating income 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 marketing department is correct in its estimation?
Explanation / Answer
Selling Price 7000 Costs 5400 Profit 1600 New sales 1100 Letthe sales be x Operating Income = .2x Variable cost 5940000 Now X -5940000= .2 X .8 x = 5940000 x =- 5940000/.8 X = 7425000 Selling price 7425000/1100 6750 The target selling price will be $ 6750 b Chane in Operating Income Old New Units 1000 1100 Sales 7000000 7425000 Cost 5400000 5940000 Income 1600000 1485000 The operating income will decrease by $115,000 (1600000-1485000) c If the company wants to maintain the cost sholud be 115000/1100 104.545455 Decrease in cost 5400-105 5295 The target cost should be $ 5295