Martin Manufacturers produces 3 models of industrial hammers. Martin uses the target pricing approach. The company's objective is to achieve gross profit equal to 40% of selling price. Other data are shown below:
$$\begin{array} { l l }
\text { Current production cost } & \$ 42.50 \text { per unit } \
\text { Current market price } & \$ 60.00 \text { per unit }
\end{array}$$
What must the company do to achieve their profit goal? (Please round all amounts to the nearest cent.)
A) Reduce production cost by $6.50 per unit.
B) Increase price by $0.50 per unit.
C) Reduce production cost by $4.20 per unit.
D) Increase price by $6.50.

Question

Martin Manufacturers produces 3 models of industrial hammers. Martin uses the target pricing approach. The company's objective is to achieve gross profit equal to 40% of selling price. Other data are shown below:
$$\begin{array} { l l } 
\text { Current production cost } & \$ 42.50 \text { per unit } \
\text { Current market price } & \$ 60.00 \text { per unit }
\end{array}$$
What must the company do to achieve their profit goal? (Please round all amounts to the nearest cent.)
A) Reduce production cost by $6.50 per unit.
B) Increase price by $0.50 per unit.
C) Reduce production cost by $4.20 per unit.
D) Increase price by $6.50.

Quizplus · Accepted Answer

To achieve a 40% gross profit margin on the selling price, the cost should be 60% of the selling price. Thus, the target cost is 60% of $60, which is $36. The current cost is $42.50, so the company needs to reduce the cost by $6.50 per unit ($42.50 - $36 = $6.50).

Martin Manufacturers Produces 3 Models of Industrial Hammers What Must the Company Do to Achieve Their Profit Goal