Reuter Avionics Currently Sells Radios for $1,800

question 148

Essay

Reuter Avionics currently sells radios for $1,800.It has costs of $1,400.A competitor is bringing a new
radio to market that will sell for $1,600.Management believes it must lower the price to $1,600 to
compete in the market for radios.Marketing believes that the new price will cause sales to increase by
10%, even with a new competitor in the market.Reuter's sales are currently 1,000 radios 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:

Cash Dividend

The distribution of some of a company's earnings to its shareholders as determined by the company's board of directors.

Waste Management System

A systematic approach to handling both disposal and recycling of waste materials in an environmentally friendly manner.

Liquidating Dividend

A type of dividend paid by a company to its shareholders from its capital rather than its earnings, often signaling the company is dissolving its assets.

Retained Earnings Restrictions

Limitations or constraints placed on the portion of earnings that are not distributed as dividends but kept within the company for reinvestment or other purposes.