Spot-On wants to begin manufacturing and selling a new product, the Sporty Spot.Spot-On requires a 25% gross margin on all new products.Marketing research indicates customers are interested in purchasing the Sporty Spot.If the production supervisor has agreed to produce the Sporty Spot at its target cost of $6.75 per unit, what is the price customers are willing to pay for the Sporty Spot (if necessary, round your answer)?

Question

Quizplus · Accepted Answer

To calculate the price customers are willing to pay, we need to use the formula: 
Price = Cost/(1 - Desired Gross Margin)
The desired gross margin is 25%, which means the fraction of the selling price that is profit is (100% - 25%) = 75%. So the formula becomes:
Price = $6.75/(1 - 0.75) = $6.75/0.25 = $27.00
However, we need to ensure that the price is not lower than the cost plus the desired gross margin, which is $6.75/(1 - 0.25) = $9.00. Therefore, the best choice is D, $9.00.

Spot-On Wants to Begin Manufacturing and Selling a New Product