Clark Manufacturing makes blank CDs; it is a very competitive market and the company follows a target pricing strategy. Currently the market price for a unit of product (one unit equals a package of 100 CDs) is $18.00. Clark's production costs are shown below:
Direct materials $5.00 per unit
Direct labor $2.90 per unit
Indirect production costs $6.42 per unit
Non-manufacturing costs $3.20 per unit
Clark uses activity-based costing for its indirect production costs and provides the following information about this particular product:
-
The company's objective is to earn 5% profit on the sales price of the product. Based on the above data, how much cost reduction does the company need to achieve its objective?
A) $0.90
B) $0.34
C) $0.42
D) $0.62

Question

Clark Manufacturing makes blank CDs; it is a very competitive market and the company follows a target pricing strategy. Currently the market price for a unit of product (one unit equals a package of 100 CDs) is $18.00. Clark's production costs are shown below:
Direct materials $5.00 per unit
Direct labor $2.90 per unit
Indirect production costs $6.42 per unit
Non-manufacturing costs $3.20 per unit
Clark uses activity-based costing for its indirect production costs and provides the following information about this particular product: 
-
The company's objective is to earn 5% profit on the sales price of the product. Based on the above data, how much cost reduction does the company need to achieve its objective?
A) $0.90 
B) $0.34 
C) $0.42 
D) $0.62

Quizplus · Accepted Answer

C) Calculations:
$18.00 - ($18.00 × 5%) = $17.10
$5.00 + $2.90 + $6.42 + $3.20 = $17.52
$17.10 - $17.52 = ($0.42)

Clark Manufacturing Makes Blank CDs; It Is a Very Competitive