Answer the following questions using the information below:
Frank's Computer Monitors, Inc., currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for 17" monitors. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Frank's sales are currently 10,000 monitors per year.
-What is the target cost if operating income is 25% of sales?
A)$56.25
B)$67.50
C)$168.75
D)$202.50

Question

Quizplus · Accepted Answer

First, we need to calculate the new sales revenue with the new price and the 10% increase in sales:

New sales revenue = (10,000 monitors/year * $225/monitor) * 1.1 = $2,475,000

Next, we need to calculate the target cost using the desired operating income percentage:

Target cost = sales revenue - desired operating income
Target cost = $2,475,000 - (0.25 * $2,475,000)
Target cost = $1,856,250

Finally, we need to subtract the variable cost per monitor (costs) from the target cost to get the target selling price:

Target selling price = target cost - variable cost per unit
Target selling price = $1,856,250/10,000 - $210
Target selling price = $185.63 - $210
Target selling price = -$24.37

Since the target selling price is negative, it means that Frank's cannot achieve the desired operating income percentage with the given costs and price changes. Therefore, the best choice is to maintain the current price and focus on other strategies to compete with the new competitor in the market. Answer: A and B

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