Kezer Crafts Currently Sells Motor Boats for $6,000

question 166

Essay

Kezer Crafts 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. Kezer Crafts' sales are currently 2,000 motor boats per year.
Required:
a. What is the target cost if target operating income is 25% of sales?
b. What is the change in operating income if marketing is correct and only the sales price is changed?
c. What is the target cost if the company wants to maintain its same income level, and marketing is correct?

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Definitions:

Demand Deposits

Balances in bank accounts that depositors can access on demand by writing a check.

Liquid

In financial terms, describes assets that can be easily converted into cash without much loss in value.

Demand Deposits

Accounts held in banks that can be withdrawn at any time without any advance notice to the financial institution.

Debit Card

A payment card that deducts money directly from a consumer's checking account to pay for a purchase, rather than using a credit line.