Target cost for the new price and change in operating income for the year.
We-Catch Corporation manufactures fishing poles that have a price of $21.00. It has costs of $16.32. A competitor is introducing a new fishing pole that will sell for $18.00. Management believes it must lower the price to $18.00 to compete in the highly cost-conscious fishing pole market. Marketing believes that the new price will maintain the current sales level. We-Catch Corporation's sales are currently 200,000 poles per year.
a.What is the target cost for the new price if target operating income is 20% of sales?
b.What is the change in operating income for the year if $18.00 is the new price and costs remain the same?
c.What is the target cost per unit if the selling price is reduced to $18.00 and the company wants to maintain its same income level?