Meson Production is a price-taker. It produces large spools of electrical wire in a highly competitive market, so it practices target pricing. The current market price of the electric wire is $780 per unit. The company has $3,000,000 in assets and its shareholders expect a return of 6% on assets. The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 700&\text { per unit } \
\hline \text { Fixed cost } & \$ 120,000,000 &\text { per year } \
\hline
\end{array}$$
If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

Question

Meson Production is a price-taker. It produces large spools of electrical wire in a highly competitive market, so it practices target pricing. The current market price of the electric wire is $780 per unit. The company has $3,000,000 in assets and its shareholders expect a return of 6% on assets. The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 700&\text { per unit } \
\hline \text { Fixed cost } & \$ 120,000,000 &\text { per year } \
\hline
\end{array}$$
 If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the profit target?

Quizplus · Accepted Answer

The correct answer is A.The company's profit target is 6% of its assets, which is $3,000,000 * 0.06 = $180,000. The company's current profit is $100,000 * ($780 - $700) - $120,000,000 = $8,000,000. Therefore, the company needs to reduce its fixed costs by $8,000,000 - $180,000 = $7,820,000 to achieve its profit target.

Meson Production Is a Price-Taker If Variable Costs Cannot Be Reduced, How Much Reduction in Electrical