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Target Pricing: Steven Corporation manufactures fishing pole

Steven 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. Steven 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?

Solution Preview

a) Target Cost = Target Price *(1-operating margin) = 18.00*(1-20%)=$14.40
b) Current price = $21.00
Current operating income per unit = 20%*21=$4.20 ...

Solution Summary

Illustrates how to apply concepts of target pricing in pricing strategy for desired profitability