On Point, Inc., is interested in producing and selling a deluxe electric pencil

Question

On Point, Inc., is interested in producing and selling a deluxe electric pencil sharpener. Market research indicates that customers are willing to pay $40 for such a sharpener and that 20,000 units could be sold each year at this price. The cost to produce the sharpener is currently estimated to be $34. a. If On Point requires a 20 percent return on sales to undertake production of a product, what is the target cost for the new pencil sharpener? If a competitor sells basically the same sharpener for $36, what would On Point's target cost be to maintain a 20 percent return on sales? b. c. At a price of $36, On Point estimates that it can sell 21,000 sharpeners per year. Assuming , would On Point earn more or less profit per year at the $36 selling target costs are reached price compared to the original estimated selling price of $40?

Explanation / Answer

a) Target cost = Selling price - profit margin

Selling price = $40

profit margin or return - 20% on sales = $8 per sharpener

hence target cost = $32

b) If On Point will maintain the selling price of the competitor, then selling price is $36 then On Point target cost will be $36 - $7.20 = $28.8

c) Here is the calculation of the profit

Profit at selling price of $40 is giving more profit.

Option A Option B Units sold            20,000            21,000 Selling Price $ 40.00 $ 36.00 12 Target Cost $ 32.00 $ 28.80 Profit Margin $ 8.00 $ 7.20 Total Profit        1,60,000        1,51,200

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