Answer the following questions using the information below:
Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 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 100,000 televisions per year.
-What is the target cost if target operating income is 25% of sales?
A)$75
B)$90
C)$225
D)$270

Question

Quizplus · Accepted Answer

Target operating income = 25% of sales = 0.25 x (100,000 x $360) = $9,000,000
New sales quantity after price reduction = 100,000 x 1.10 = 110,000
New selling price = $300
New target variable cost per unit = $300 - $9,000,000/110,000 = $219.09
Target cost = $219.09 + $280 = $499.09, rounded to $500

Therefore, the target cost is $500.

Answer: A and B

Option A: Block Island TV should reduce its selling price to $300, the same as the competitor's price. This will increase sales by 10%, but will also result in lower profit per unit.

Option B: Block Island TV should keep the selling price at $360 and continue to differentiate itself from the competitor. This strategy may result in fewer sales, but higher profit per unit.

Both options have their advantages and disadvantages, and the best choice(s) depends on Block Island TV's overall strategy and goals.

Answer the Following Questions Using the Information Below