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: 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?

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:  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?

Quizplus · Accepted Answer

First, we need to calculate the target cost, which is the market price minus the desired profit:

Target Cost = Market Price x (1 - Desired Profit)
Target Cost = $18.00 x (1 - 0.05)
Target Cost = $17.10

Next, we need to calculate the current cost:

Current Cost = Direct Materials + Direct Labor + Indirect Costs
Current Cost = $6.00 + $3.50 + $0.56
Current Cost = $10.06

Finally, we can calculate the cost reduction needed to achieve the target cost:

Cost Reduction = Current Cost - Target Cost
Cost Reduction = $10.06 - $17.10
Cost Reduction = $7.04

However, the question is asking for the cost reduction per unit of product (one unit equals a package of 100 CDs). Therefore, we need to divide the cost reduction by 100:

Cost Reduction per Unit = Cost Reduction / 100
Cost Reduction per Unit = $7.04 / 100
Cost Reduction per Unit = $0.0704

Rounding to the nearest cent gives us $0.42, which is answer choice C.

Clark Manufacturing Makes Blank CDs; It Is a Very Competitive