Question - Summit Products, Inc. is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $70 for such a widget and that 30,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $50.
a) If Summit Products requires a 10% return on sales to undertake production, what is the target cost for the new widget?
b) Summit has learned that a competitor plans to introduce a similar widget at a price of $60. In response, Summit may reduce its selling price to $60. If Summit requires a 10% return on sales, what is the target cost for the new widget?
c) At a price of $60, Summit's market research indicates that it can sell 40,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $60 price compare to what it would have earned in the absence of the competitor's product?