Electronic Component Company (ECC) Is a Producer of High-End Video

question 39

Multiple Choice

Electronic Component Company (ECC) is a producer of high-end video and music equipment. ECC currently sells its top of the line "ECC" video player for a price of $250. It costs ECC $210 to make the player. ECC's main competitor is coming to market with a new video player that will sell for a price of $220. ECC feels that it must reduce its price to $220 in order to compete. The sales and marketing department of ECC believes the reduced price will cause sales to increase by 15%. ECC currently sells 200,000 video players per year.
What is the target cost if target profit is 20% of sales and ECC must meet the competitive price of $220?

• A) $168.50.
• B) $176.00.
• C) $184.25.
• D) $190.00.

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Definitions:

Independent Projects

Investment projects that do not affect each other’s outcomes or acceptability. Evaluating one does not impact the consideration of another.

Mutually Exclusive

Situations or decisions that cannot occur simultaneously; selecting one option precludes the choice of the other.

Net Present Value

The difference between the current value of cash inflows and the current value of cash outflows over a period of time; used to evaluate the profitability of an investment.

Internal Rate of Return

The interest rate that brings the net present value of all incoming and outgoing cash flows from an investment or project to a neutral point of zero.