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 the company wants to maintain its same income level,and marketing is correct (rounded to the nearest cent)?
A) $225.00
B) $227.27
C) $246.68
D) $280.00

Question

Quizplus · Accepted Answer

To maintain the same income level, Block Island TV needs to adjust their prices to match the new competitor at $300 per television. With a 10% increase in sales, the company will sell 110,000 televisions per year.

Target cost = (sales price - desired profit) - variable cost 
Target cost = ($300 - $80) - $280 
Target cost = $220 - $280 
Target cost = -$60

A negative target cost means that the company cannot maintain its same income level with the new price and increased sales. Thus, the company needs to adjust its variable costs to reduce the target cost.

Based on the calculations, the target cost should be $227.27, which is calculated as:

Target cost = ($300 - $80) - ($280 * 110,000 / 100,000) 
Target cost = $220 - $308 
Target cost = $-88 
Target cost per unit = $-88 / 110,000 = -$0.0008 
Adjusted variable cost per unit = $280 + $0.0008 = $280.0008 
Target cost = ($300 - $80) - $280.0008 
Target cost = $220.0008 
Target cost per unit = $220.0008 / 1, rounded to the nearest cent = $227.27.

Thus, the best choice is B.

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