The management of Giammarino Corporation is considering introducing a new product--a compact barbecue. At a selling price of $78 per unit, management projects sales of 10,000 units. Launching the barbecue as a new product would require an investment of $100,000. The desired return on investment is 11%. The target cost per barbecue is closest to:
A) $86.58
B) $78.00
C) $76.90
D) $85.36

Question

Quizplus · Accepted Answer

To calculate the target cost per barbecue, we need to use the following formula:

Target Cost = Selling Price - Desired Profit

First, let's calculate the desired profit:

Desired Profit = Investment x Desired ROI
Desired Profit = $100,000 x 11%
Desired Profit = $11,000

Next, let's calculate the total revenue from sales:

Total Revenue = Selling Price x Sales Volume
Total Revenue = $78 x 10,000
Total Revenue = $780,000

Now we can use the formula to calculate the target cost per barbecue:

Target Cost = Selling Price - Desired Profit
Target Cost = $78 - $11.00
Target Cost = $67.00

Therefore, the target cost per barbecue is $67.00. However, launching the product requires an investment of $100,000. To include this investment in the target cost calculation, we'll add it to the desired profit:

Desired Profit Adjusted = Desired Profit + Investment
Desired Profit Adjusted = $11,000 + $100,000
Desired Profit Adjusted = $111,000

Now we can recalculate the target cost per barbecue:

Target Cost = Selling Price - Desired Profit Adjusted
Target Cost = $78 - $111.00
Target Cost = $67.90

The closest answer choice to $67.90 is C) $76.90. Therefore, C) $76.90 is the best choice.

The Management of Giammarino Corporation Is Considering Introducing a New