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, 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 profit—half 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 year’s 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 ______.

Answer 1

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Answer (3a):

Unit cost to maintain sales market share = $14 – $4 = $10 (Given $14 reqd to match foreign companies)

Answer (3b):

Unit cost to expand sales by assuming profit of $4  = $12 – $4 = $8 (As indicated by consultant )

Answer (3c):

Given the Current cost = $16

Hence, Cost reduction to maintain market sales = $16 – $10 = $6 (From above unit cost to maintain share = $10)

Also, the Cost reduction to expand market sales = $16 – $8 = $8 (From above unit cost to expand share = $8)