WDY Corporation 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. WDY's managers are considering implementing a Kaizen costing system.
As part of its Kaizen costing project, WDY'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

If the price of the product declines by 20%, the new selling price per unit would be $85 x 0.8 = $68.

To maintain the same profit margin of 30%, the cost per unit must be 70% of the selling price:

$68 x 0.70 = $47.60

This represents a cost reduction of 44% ($47.60 / $85), which is more than 20%. Therefore, the correct answer is C - more than 20%.

WDY Corporation Currently Sells Its Primary Product for $85 Per