Hobart Boating Supplies currently sells motor boats for $16 000. It has costs of

Question

Hobart Boating Supplies currently sells motor boats for $16 000. It has costs of $13 000. A competitor is bringing a new motor boat to the market that will sell for $15 500. Management believes it must lower the price to $15 500 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Hobart Boating Supplies' sales are currently 2000 motor boats per year. Required: a) What is the target cost if target operating profit is 25% of sales? b) What is the change in operating profit if marketing is correct and only the sales price is changed? (5 marks) 4 marks) (5 marks) c) What is the target cost if the company wants to maintain its same profit level, and marketing is correct?

Explanation / Answer

A) target sales price = $15500

Less profit on sale @ 25 %= $3875

Target cost for 2000 units = 15500-3875= $ 11625

If sales raised by 12.5 % that means cost also increase with the same %

Total target cost for increased units 2250 = 11625×1.125

= $ 13078

B) Previous operating profit = 16000-13000=3000

New operating profit = (2250 units × new sale price)-13078

New sale price = 15500/2000 = 7.75

(2250 * 7.75)- 13078= $ 4359.5

Increased operating profit = 4359.5 - 3000

= $ 1359.5

C) Total sale = 2250×7.75 = 17437.5

Less : current profit = 3000

Target cost = 17435.5-3000= $14437.5

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