Calculate the cost increase of changing armpad to TPU. We know that TPU increase

Question

Calculate the cost increase of changing armpad to TPU. We know that TPU increased the cost of the armpad by 30%, the arm pad contributes up to 10% of the cost of the chair, the retail price is $750, and, in 2002, the gross margin and operating income were 30% and 0.4%, respectively. You can assume that the retailer had 33% gross margin. Implied revenue per chair is about $500. You can also assume that the material cost was 60% of the total cost of the chair.

Select one: a. $6-10 per chair b. $30 per chair c. $10-20 per chair d. Over $30 per chair

Explanation / Answer

Correct answer is option c. $ 10.20 per chair

It is given that Implied revenue per chair is about $500.

You can also assume that the material cost was 60% of the total cost of the chair = $ 500* 60% = $ 300

And retailer price was $ 500 *1.33 =$ 665

But now retailer price = $ 750

Then implied revenue will be $ 750 /1.33= $ 564

And the material cost at 60% of the total cost of the chair = $ 564 * 60% = $ 338.35

Arm pad is 10% of cost of chair therefore arm pad’s cost = $ 338.35 * 10% = $ 33.84

Now TPU increased the cost of arm pad = cost of arm pad * 30% = $ 33.84 *30% = $10.20 per chair   

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