Question

Carbon Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90.00. 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

Answer 1

To calculate the target cost for the new price of $110.00, multiply the target sales, target price, and target operating income margin. The target cost is $5,500,000.

Step-by-step explanation:

To calculate the target cost for the new price of $110.00, we need to determine the target operating income. Management wants a target operating income of 25% of sales. Since the new price is $110.00 per fishing pole and the current sales level is 200,000 poles per year, the target operating income can be calculated as follows:

Target Operating Income = Target Sales * Target Operating Income Margin

Target Operating Income = $110.00 * 200,000 * 0.25 = $5,500,000

Therefore, the target cost for the new price of $110.00 is $5,500,000.

Answer 2

Carbon Composite Poles

The target cost for the new price if target operating income is 25% of sales is:

= $82.50.

Step-by-step explanation:

a) Data and Calculations:

Current price of fishing poles = $125.00

Cost of production per unit = $90.00

Competitor's price for a new fishing pole = $110.00

Management agreed new price per fishing pole = $110

Current sales level per year = 200,000 poles

Target operating income = 25% of sales

Cost = 100 - 25% = 75%

Cost = $110 * 75%

= $82.50

Check:

25% of $110 = $27.50

Cost = $82.50

Selling price = $110 ($27.50 * $82.50)