Rudy Enterprises currently sells a piece of luggage for $200. An aggressive competitor has announced plans for a similar product that will be sold for $170. Rudy'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 luggage is $130, and Rudy has a profit goal of 30% of sales. If Rudy meets competitive selling prices, what must happen to the company's manufacturing and distribution cost?
A) Nothing, because the costs are within defined ranges and can actually increase by $10.
B) Nothing, because the costs are within defined ranges and can actually increase by $23.
C) Costs must decrease by $11.
D) Costs must decrease by $39.
E) None of the answers is correct.

Question

Quizplus · Accepted Answer

To meet the profit goal of 30% of sales at the competitive price of $170, the cost must be reduced. The target selling price is $170, and with a 30% profit margin, the target cost should be 70% of $170, which is $119. Since the current cost is $130, the cost must decrease by $11 ($130 - $119 = $11).

Rudy Enterprises Currently Sells a Piece of Luggage for $200