Block Island TV currently sells large televisions for $380. It has costs of $290. A competitor is bringing a new large television to market that will sell for $320. Management believes it must lower the price to $320 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 120,000 televisions 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) $224.00
B) $238.18
C) $230.00
D) $290.00

Question

Quizplus · Accepted Answer

Increase in sales: 120,000 x (1 + 10%) = 132,000
Current income = 120,000 × ($380 - $290) = $10,800,000
Target cost y: $10,800,000 = (132,000 × $320) - 132,000y
y = $31,440,000/132,000 = $238.18

Block Island TV Currently Sells Large Televisions for $380