Question

Electronic Component Company (ECC) is a producer of high-end video and music equipment. ECC currently sells its top of the line "ECC" video player for a price of $250. It costs ECC $210 to make the player. ECC's main competitor is coming to market with a new video player that will sell for a price of $220. ECC feels that it must reduce its price to $220 in order to compete. The sales and marketing department of ECC believes the reduced price will cause sales to increase by 15%. ECC currently sells 200,000 video players per year. Assuming sales and marketing are not correct in their estimation and the volume of sales is not changed and ECC meets the competitive price, what is the target cost if ECC wants to maintain its same income level

Answer 1

ECC and Target Costing

Target cost to maintain same income level is:

$180

Step-by-step explanation:

a) Data and Calculations:

Unit Selling price = $250

Unit Cost price = $210

Competitors' unit selling price = $220

Current annual quantity sold = 200,000

Target unit profit = $40 ($250 - 210)

b) For ECC to meet the competitive price of $220 and still maintain the same income level of $40 per unit, the target cost will not exceed $180 ($220 - 40). The target cost is the cost that ECC must not exceed in order to achieve a target contribution or profit of $40 per unit of video players sold.