Question

Block Island TV currently sells large televisions for $360. It has costs of $280. A competitor is bringing a new large television to market that will sell for $300. Management believes it must lower the price to $300 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 100,000 televisions per year. What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? A. $225.00 B. $227.27 C. $246.68 D. $280.00

Answer 1

Answer:

B ($227.27)

Explanation:

Before the competitor arrived

Annual cost = $280 × 100,000 = $28,000,000

Annual sales = $360 × 100,000 = $36,000,000

Annual profit = $36,000,000 - $28,000,000 = $8,000,000

When the competitor arrived

Quantity sold annually increases by 10% = 100,000 + (100,000×0.1) = 100,000 + 10,000 = 110,000

Annual sales = $300 × 110,000 = $33,000,000

Target cost to make a profit of $8,000,000 = ($33,000,000 -$8,000,000)/110,000 = $25,000,000/110,000 = $227.27