Question

UR Safe Systems installs home security systems. Two of its systems, the ICU 100 and the ICU 900, have these characteristics:

Design Specifications	ICU 100			ICU 900			Cost Data
Video cameras		1			3		$	150	/ea
Video monitors		1			1		$	75	/ea
Motion detectors		5			8		$	15	/ea
Floodlights		3			7		$	8	/ea
Alarms		1			2		$	15	/ea
Wiring		700	ft.		1,100	ft.	$	0.10	/ft.
Installation		16	hr		26	hr	$	20	/hr

The ICU 100 sells for $810 installed, and the ICU 900 sells for $1,520 installed.

Required:

1. What are the current profit margin percentages on both systems?

ICU 100

Current Profit Margin (%):

ICU 900

Current Profit Margin (%):

2. UR Safe’s management believes that it must drop the price on the ICU 100 to $750 and on the ICU 900 to $1,390 to remain competitive in the market. Recalculate profit margin percentages for both products at these price levels and then compute the target cost needed for each product to maintain the current profit margin percentages.

ICU 100

Profit Margin (%):

Target Profit:

ICU 900

Profit Margin (%):

Target Profit:

Answer 1

Answer 1 Computation of Current Profit Margin (%)

	ICU 100	ICU 900
Video cameras	(1 * $150) = 150	(3 * $150) = 450
Video monitors	(1 * $75) = 75	(1 * $75) = 75
Motion detectors	(5 * $15) = 75	(8 * $15) = 120
Floodlights	(3 * $8) = 24	(7 * $8) = 56
Alarms	(1 * $15) = 15	(2 * $15) = 30
Wiring	(700 * $0.10) = 70	(1,100 * $0.10) = 110
Installation	(16 * $20) = 320	(26 * $20) = 520
Total Cost	$729	$1,361
Selling Price	$810	$1,520
Profit	$81	$159
Current Profit Margin (%)	10 %	10.46 %

Answer 2 :

Computation of Profit Margin (%) & Target Cost for ICU 100

Profit Margin (%) = (Revised selling price - Total cost ) / Revised selling price

= ($750 - $729) / $750 = 2.80 %

Target Cost : Revised selling price - ( Revised selling price * Current Profit Margin %)

= $750 - ($750 * 10 %) = $750 - $75 = $675

Computation of Profit Margin (%) & Target Cost for ICU 900

Profit Margin (%) = (Revised selling price - Total cost ) / Revised selling price

= ($1,390 - $1,361) / $1,390 = 2.09 %

Target Cost : Revised selling price - ( Revised selling price * Current Profit Margin %)

= $1,390 - ($1,390 * 10.46 %) = $1,390 - $145.39 = $675 = $1,244.61