WDY currently sells its primary product for $85 per unit, with a profit margin of 30%. Cost of goods sold totals 40% of the product's total cost. WDY's managers are considering implementing a kaizen costing system. As part of its kaizen costing project, WDY's accountants estimate the price of the product will decline by 20% next year. To maintain the same profit margin, the total cost per unit will have to be reduced by

Question

Quizplus · Accepted Answer

Since the price of the product is estimated to decline by 20%, the profit margin of 30% must be maintained by reducing the total cost per unit by an equivalent amount, which is 20% of the current selling price ($85).

20% of $85 = $17

To maintain the same profit margin, the total cost per unit must be reduced by $17. Since the cost of goods sold currently accounts for 40% of the product's total cost, a reduction of $17 in the total cost per unit will require a reduction of 42.5% (17/40) in the cost of goods sold.

Therefore, the total cost per unit will have to be reduced by more than 20%.

WDY Currently Sells Its Primary Product for $85 Per Unit