PNY currently sells its primary product for $85 per unit, with a profit margin of 30%. Cost of goods sold totals 40% of the product's total cost. PNY's managers are considering implementing a kaizen costing system. As part of its kaizen costing project, PNY's accountants estimate the price of the product will decline by 20% next year. To maintain the same profit margin, the total cost per unit will have to be reduced by:

Question

Quizplus · Accepted Answer

The profit margin is calculated based on the selling price, and if the selling price decreases by 20%, the total cost must decrease by a proportion greater than 20% to maintain the same profit margin. This is because the profit margin is a percentage of the selling price, and a decrease in selling price without a proportionally greater decrease in cost would result in a lower profit margin.

PNY Currently Sells Its Primary Product for $85 Per Unit