Answer the following questions using the information below:
Frank's Computer Monitors, Inc., currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors per year.
-What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)?
A)$168.75
B)$170.46
C)$185.00
D)$210.00

Question

Quizplus · Accepted Answer

To maintain the same income level, Frank's needs to adjust the price and the cost, so that the new contribution margin multiplied by the new sales volume equals the current income level.

First, we need to calculate the new sales volume using the 10% increase provided:

New Sales Volume = 10,000 * 1.1 = 11,000

Next, we need to calculate the new contribution margin, which is the selling price minus the variable cost:

New Contribution Margin = $225 - $210 = $15

Now we can use the contribution margin ratio to calculate the target cost, which is the fixed cost plus the variable cost that equals the new contribution margin ratio multiplied by the new selling price:

Contribution Margin Ratio = $15/$225 = 6.67%
Target Cost = ($210 + $225*(1-6.67%)) * 11,000 = $1,874,575
Rounded to the nearest cent, the target cost is $170.46.

Therefore, the best choice is B, as it is the closest option to the calculated target cost.

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