Problem:
Marner Mfg. Ltd is looking at modifying one of their key products that currently sells for $255 each and has total costs of $204 each. Sales of this product have begun to decline and Marner needs to do something to boost sales and continue to compete effectively in the market. There are four (4) possible modifications that may be done to the product, which may be done in any combination. Cost information for the modifications follows:
Modification Cost (per unit)
A $22.00
B $7.50
C $4.75
D $12.75
The average selling price of competitive units is $305. This average price includes units that have none of the above modifications, some with all of the modifications, and varying combinations for others. If Marner Mfg. were to use target costing and maintain the same return it currently earns, what is the maximum that could be spent on product modifications?
a. $0
b. $9
c. $40
d. $47
e. $50