The target cost if target operating income – Managerial Economics
A boat company currently sells motor boats for $6,000. It has costs of $4,650. A competitor is bringing a new motor boat to the market that will sell for $5,500. Management believes it must lower the price to $5,500 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. The boat company’s sales are currently 2,000 motor boats per year.
Determine the following:
1. The target cost if target operating income is 25% of sales
2. The change in operating income if marketing is correct and only the sales price is changed
3. The target cost if the company wants to maintain its same income level, and marketing is correct
