Franklin Electronics currently sells a camera for $240. An aggressive competitor has announced plans for a similar product that will be sold for $205. Franklin's marketing department believes that if the price is dropped to meet competition, unit sales will increase by 10%. The current cost to manufacture and distribute the camera is $175, and Franklin has a profit goal of 20% of sales. If Franklin meets competitive selling prices, what is the company's target cost?
A)$41.
B)$48.
C)$164.
D)$175.
E)$192

Question

Quizplus · Accepted Answer

If Franklin reduces the selling price to $205, its new revenue per unit sold would be:
New revenue = $205 * 1.10 = $225.50
Franklin's profit goal is 20% of sales, so the target cost can be found as:
Target cost = New revenue - Target profit
Target profit = 20% * $225.50 = $45.10
Target cost = $225.50 - $45.10 = $180.40
However, the current cost to manufacture and distribute the camera is $175, so Franklin cannot exceed this cost in order to meet its profit goal. Therefore, the target cost is $175. Franklin Electronics would need to find ways to reduce its production costs in order to maintain its profit margin while meeting competitive prices.

Franklin Electronics Currently Sells a Camera for $240