ABC Company currently makes product for 1,650, and sells it for 1,980 dollars in

Question

ABC Company currently makes product for 1,650, and sells it for 1,980 dollars in the overseas market. The increasing competition from various manufacturers has made ABC be reduced to 1,800 dollars. However, the company does not want to lower its current profit margin percentage. In order to make this happen, what amount of cost reduction is required on the part of the company? In other words, what should be the target cost of the product with the In order to make this happen, what amount of cost reduction is required on the part of the company? In other words, what should be the target cost of the product with the new price?

Explanation / Answer

Current profit = 1980-1650 i.e 330

Profit margin on cost = 330/1650 i.e 0.20 or 20%

Let the target cost of the product be X

X + 0.20X = 1800

1.20X = 1800

X = 1800/1.20 i.e 1500

Target cost of the product to make the sale possible at 1800 with the same profit margin percentage = 1500

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