Question

2. Phillips Company can sell 15,000 units of its new product at a selling price of $116. The unit cost is $72. The company's target profit is 40% of sales. The Vice President of Marketing has learned that a competitor plans to introduce a similar product for $104. T Vice President has recommended that Phillips match the competitor's price. She believes the lower selling price will increase sales volume by 20%. Required: 1) Compute the company's net income assuming the product is sold for $116 and the costs remain at $72. Assume there were no additional costs. 2) Compute the product's target cost if it is sold at a $116 selling price. 3) Compute the company's net income if the target cost computed in Requirement 2 is achieved. 4) Compute the change in income from Requirement 1 if the product is sold for $104, costs remain at $72, and volume is increased by 20%.

Answer 1

1) $116 $72 Selling price per unit Less: Cost per unit Net income per unit Number of units sold Net income $44 ($116 - $72] 15,000 $660,000 [15000 units x $44] 2) Product's target cost = Selling price per unit x (1 - Target profit % on sales) Selling price per unit Target profit % on sales Product's target cost $116 40% $69.60 ($116 x (1-40%) = $116 x 60% = $69.60] 3) Selling price per unit Less: Cost per unit Net income per unit Number of units sold Net income $116 $69.60 [As calculated in Part-2] $46.40 ($116 - $69.6] 15,000 $696,000 [15000 units x $46.40] 4) Selling price per unit Less: Cost per unit Net income per unit Number of units sold Net income $104 [Revised] $72 [Remained same] $32 ($104 - $72] 18,000 15000 x 120% --> 20% increase in sales units] $576,000 (18000 units x $32]