E16.5 (LO 3), AP Cam is studying the costs of the most popular TV model in his showroom, the TX5. It costs $200 to purchase from the supplier, yet Cam's company sells it for $350. His boss, Karin, mentioned they'd be adding another TV model to their selection: the TX7. The TX7 will cost his company $375 from the supplier; however, they expect the cost to decrease after it's been on the market awhile. Karin thinks the reduced pur- chase cost will be $325 in 2 months. Regardless of which TV model it sells, the company incurs selling and administrative costs of $80 per TV. Required a. What is the current markup percentage that Cam's company is using on full cost for the TX5 TVs? b. If the company uses that same markup percentage for the new TX7 model, what is its price? How much profit margin does that represent for the company for this new model? Specify profit amount and profit margin percentage. c. If the company uses that same markup percentage for the new model 2 months down the road, when the cost of the TV is likely to be lower, what will the selling price be at that time? Does it seem appropriate that this electronics store would change its selling price for the same TV just because its own costs change? Explain what issues this presents for customers and for the store itself. d. Assume the operating assets attributable to TV sales amount to $500,000 and the company's target ROI is 12%. Will Cam's company meet that ROI goal considering the scenarios in parts (a), (b), and (c)? Assume a sales volume of 1,000 units under each scenario.
E16.5 (LO 3), AP Cam is studying the costs of the most popular TV model in his showroom, the TX5. It costs $200 to purchase from the supplier, yet Cam's company sells it for $350. His boss, Karin, mentioned they'd be adding another TV model to their selection: the TX7. The TX7 will cost his company $375 from the supplier; however, they expect the cost to decrease after it's been on the market awhile. Karin thinks the reduced pur- chase cost will be $325 in 2 months. Regardless of which TV model it sells, the company incurs selling and administrative costs of $80 per TV. Required a. What is the current markup percentage that Cam's company is using on full cost for the TX5 TVs? b. If the company uses that same markup percentage for the new TX7 model, what is its price? How much profit margin does that represent for the company for this new model? Specify profit amount and profit margin percentage. c. If the company uses that same markup percentage for the new model 2 months down the road, when the cost of the TV is likely to be lower, what will the selling price be at that time? Does it seem appropriate that this electronics store would change its selling price for the same TV just because its own costs change? Explain what issues this presents for customers and for the store itself. d. Assume the operating assets attributable to TV sales amount to $500,000 and the company's target ROI is 12%. Will Cam's company meet that ROI goal considering the scenarios in parts (a), (b), and (c)? Assume a sales volume of 1,000 units under each scenario.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:E16.5 (LO 3), AP Cam is studying the costs of the most popular TV model in his showroom, the TXS5. It costs
$200 to purchase from the supplier, yet Cam's company sells it for $350. His boss, Karin, mentioned they'd be
adding another TV model to their selection: the TX7. The TX7 will cost his company $375 from the supplier;
however, they expect the cost to decrease after it's been on the market awhile. Karin thinks the reduced pur-
chase cost will be $325 in 2 months. Regardless of which TV model it sells, the company incurs selling and
administrative costs of $80 per TV.
Required
a. What is the current markup percentage that Cam's company is using on full cost for the TX5 TVs?
b. If the company uses that same markup percentage for the new TX7 model, what is its price? How much
profit margin does that represent for the company for this new model? Specify profit amount and profit
margin percentage.
c. If the company uses that same markup percentage for the new model 2 months down the road, when the
cost of the TV is likely to be lower, what will the selling price be at that time? Does it seem appropriate
that this electronics store would change its selling price for the same TV just because its own costs change?
Explain what issues this presents for customers and for the store itself.
d. Assume the operating assets attributable to TV sales amount to $500,000 and the company's target ROI is
12%. Will Cam's company meet that ROI goal considering the scenarios in parts (a), (b), and (c)? Assume
a sales volume of 1,000 units under each scenario.
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