Ignite Products is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price of the electric wire is $700 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | }
\hline \text { Sales volume } & 120,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 660 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Question

Ignite Products is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price of the electric wire is $700 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | } 
\hline \text { Sales volume } & 120,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 660 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Quizplus · Accepted Answer

To achieve the desired profit, the company needs to earn $240,000 (8% of $3,000,000) in profit. The current total cost is $660 (variable) + $116.67 (fixed per unit) = $776.67 per unit. The target cost per unit is $700 - ($240,000/120,000) = $698. The reduction needed in variable costs is $776.67 - $698 = $78.67 per unit, totaling $9,440,000 for 120,000 units.

Ignite Products Is a Price-Taker If Fixed Costs Cannot Be Reduced,how Much Reduction in Variable