Katy Co. is current selling its chair for $130, and the cost for producing a chair is $105. A competitor is bringing a new chair to market that will sell for $120. Management believes that it must lower the price to competitor's price of $120 in order to be competitive in a price-sensitive market. Expected Increase in sale with a new lowered price is 10%. Katy Co.'s current sales per year are 2,000 units.

Required:

1. What is the current operating income before lowering its selling price of chair? (10 pts)
2. What is the change in operating income after lowering the selling price of chair? Assume that marketing department is correct in its forecast that sales volume will be increased with the lowered sales price. (10 pts)
3. What is the new target cost if the company wants to maintain its current income level (or dollars)? Assume that marketing department is correct in its estimation. (5 pts)