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. If WDY is successful in achieving its Kaizen goal, the reduced nonmanufacturing cost (i.e., the cost excluding the product cost) per unit will be:

Question

Quizplus · Accepted Answer

Since the current selling price is $85 with a profit margin of 30%, the current product cost is:

Product cost = Selling price - Profit margin
Product cost = $85 - ($85 x 30%)
Product cost = $59.50

Since cost of goods sold totals 40% of the product's total cost, then:

Product cost = Cost of goods sold / 40%
$59.50 = Cost of goods sold / 40%
Cost of goods sold = $23.80

The current nonmanufacturing cost per unit is:

Nonmanufacturing cost = Selling price - Product cost
Nonmanufacturing cost = $85 - $59.50
Nonmanufacturing cost = $25.50

If the price of the product declines by 20%, the new selling price will be:

New selling price = Current selling price - (Current selling price x 20%)
New selling price = $85 - ($85 x 20%)
New selling price = $68

To maintain the same profit margin, the new product cost will be:

New product cost = New selling price - Profit margin
New product cost = $68 - ($68 x 30%)
New product cost = $47.60

Assuming that cost of goods sold remains the same, the new nonmanufacturing cost per unit will be:

New nonmanufacturing cost = New selling price - Cost of goods sold
New nonmanufacturing cost = $68 - $23.80
New nonmanufacturing cost = $44.20

Therefore, the reduced nonmanufacturing cost per unit will be $28.56 ($25.50 - $44.20) which is option B.

WDY Corporation Currently Sells Its Primary Product for $85 Per