Alexis Klark, managing director of Pharsalia Electronics (PE), is concerned about the prospects of one of its major products. She has been reviewing a marketing report with Jeff Keller, the marketing product manager for that product. The report indicates that a price reduction is needed to meet anticipated reductions by competitors. The current selling price of the product is $700 per unit. It is expected that PE's two major competitors will be selling a very similar product for $600 per unit within three months. The competition concerns Klark because the current cost of producing and selling their product is $630, which yields a $70 profit on each unit sold. The situation is alarming because PE implemented an activity-based management system about two years ago. The ABM system helped them better identify activity costs, root cause cost drivers and cost reduction opportunities. Changes made due to adopting ABM reduced costs on this product by approximately 15 per cent over the last two years. Now it appears that costs will need to be reduced considerably more to remain competitive and make a profit on the product. Total unit costs to produce, sell and service the products are as follows: Product costs per