New Price = $2,300/(1-0,038) = $2390.85
Where do we get this number from and what does it signify? (Isn't the selling price $5,200)
Thank you
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Here, the assumption is that prices will fall as the companies want to gain market share by cost competition.
Based on this assumption, the answer assumes that gross margin of 3.8% stays the same (which is a significant assumption).
With a gross margin of 3.8%, this means that 96.2% of the price goes to cost. Costs, as calculated, are now $2300. Therefore, this leads us to the conculsion that the new price will be $2390.85. To calculate this, $2,300 / 96.2% (which is the equation shown in your question).
Of course, the earlier assumptions on gross margin staying the same are worth questioning.
The new price is 42, the answer to all your questions.
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