Question
Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing report that she had just received. According to Larry Savage, marketing manager,
Danna Martin, president of Mays Electronics, was concerned about the end-of-the year marketing report that she had just received. According to Larry Savage, marketing manager, a price decrease for the coming year was again needed to maintain the company's annual sales volume of integrated circuit boards (CBs). This would make a bad situation worse. The current selling price of $18 per unit was producing a $2-per-unit profithalf the customary $4-per-unit profit. Foreign competitors kept reducing their prices. To match the latest reduction would reduce the price from $18 to $14. This would put the price below the cost to produce and sell it. How could these firms sell for such a low price? Determined to find out if there were problems with the company's operations, Danna decided to hire a consultant to evaluate the way in which the CBs were produced and sold. After two weeks, the consultant had identified the following activities and costs:
Activities | Costs |
Setting up equipment | $125,000 |
Materials handling | 180,000 |
Inspecting products | 122,000 |
Engineering support | 120,000 |
Handling customer complaints | 100,000 |
Filing warranties | 170,000 |
Storing goods | 80,000 |
Expediting goods | 75,000 |
Using materials | 500,000 |
Using power | 48,000 |
Manual insertion labor* | 250,000 |
Other direct labor | 150,000 |
Total costs** | $1,920,000 |
* Diodes, resistors, and integrated circuits are inserted manually into the circuit board. ** This total cost produces a unit cost of $16 for last years sales volume.
The consultant indicated that some preliminary activity analysis shows that per-unit costs can be reduced by at least $7. Since the marketing manager had indicated that the market share (sales volume) for the boards could be increased by 50% if the price could be reduced to $12, Danna became quite excited.
Question 3
3(a) Compute the unit cost required to maintain current market share, while earning a profit of $4 per unit.
The unit cost to maintain sales is ______.
3(b) Now compute the unit cost required to expand sales by 50%, assuming a per unit profit of $4.
The unit cost to expand sales is ______ .
3(c) How much cost reduction would be required to achieve each unit cost?
The cost reduction required to maintain current market sales is ______ .
The cost reduction required to expand market sales is ______.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started