Tuesday, May 22, 2012

How to Achieve Operating Income Target

Severe economic conditions are forcing a manufacturing company to lower prices from $50 to $40 per unit, however the company expects sales to rise from 600,000 to 750,000 units.

The manufacturing company's current cost of production is $38 per unit. Suppose this company would like to maintain a 16% target operating income (OI) on all of its sales current revenue.

To achieve this operating income target, the manufacturing company must lower its cost of production by

A. $33.60 per unit
B. $6.40 per unit
C. $2 per unit
D. $4.40 per unit









Correct Answer:

D. $4.40 per unit

Operating income = 16%* 40$= 6.4
Target cost= 40-6.4=33.6
Current cost = 38
Reduction needed = 38-33.6=4.4 $ per unit

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