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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

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Answer:

Carbon Composite Poles

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

= $82.50.

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)

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