6. arbon Composite Poles manufactures fishing poles that have a price of $125.00

Question

6.

arbon Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90. A competitor is introducing a new fishing pole that will sell for $110.00. Management believes it must lower the price to $110.00 to compete in the highly cost-conscious fishing pole market. Marketing department believes that the new price will allow Carbon to maintain the current sales level of 200,000 poles per year.

Required:

a.    What is the target cost for the new price if target operating income is 25% of sales?

b.    What is the change in operating income for the year if only the selling price is changed and costs remain the same?

c.     What is the target cost per unit if the selling price is reduced to $110.00 and the company wants to maintain its same income level?

Explanation / Answer

a) Statement showing computations Particulars Amount Target Selling price                  110.00 Target operating Income @25%                     27.50 Target Cost = 110 - 27.50                     82.50 b) Statement showing computations Particulars Existing Proposed Difference Sales @125 and 110    25,000,000.00    22,000,000.00         3,000,000.00 Costs @90    18,000,000.00    18,000,000.00                              -   Target Operating Income      7,000,000.00      4,000,000.00         3,000,000.00 c) Current income Level      7,000,000.00 No of units          200,000.00 Income per unit = 7,000,000/200,000                     35.00 Costs per unit = 110 - 35                     75.00

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