Use the information below to answer the following question(s).Acorn Products currently sells small boats for $360.It has costs currently assigned to it of $280.A competitor is bringing a new small boat to market that will sell for $300.Management believes it must lower the price to $300 to compete in the market for small boats.Marketing believes that the new price will cause sales to increase by 10 percent, even with a new competitor in the market.Acorn's sales are currently 100,000 per year.
-What is Acorn's target cost if the company wants to maintain its same income level, and marketing is correct?

Question

Quizplus · Accepted Answer

To maintain the same income level, Acorn must reduce its costs to match the new price while accounting for the increased sales. The current income per unit is $360 - $280 = $80. With a 10% increase in sales, the new sales volume is 110,000 units. To maintain the same total income, the target cost per unit is calculated as follows: New price ($300) - Target cost = Current income per unit ($80). Therefore, Target cost = $300 - $80 = $220. However, to maintain the same total income with increased sales, the target cost should be $227.27.

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