Dyggur Traders wishes to earn a 20% return on its $100,000 investment in equipment used to produce dog toys. The fixed costs cannot be changed, but the company wants to set a target cost for the variable portion. Based on estimated sales of 10,000 toys next year, the price and fixed costs per unit are: $$\begin{array} { l r }
\text { Price } & \$ 9.00 \
\text { Fixed selling and administrative costs } & 2.00 \
\text { Fixed manufacturing cost } & 1.00
\end{array}$$ What is the target variable cost per unit?

Question

Dyggur Traders wishes to earn a 20% return on its $100,000 investment in equipment used to produce dog toys. The fixed costs cannot be changed, but the company wants to set a target cost for the variable portion. Based on estimated sales of 10,000 toys next year, the price and fixed costs per unit are: $$\begin{array} { l r } 
\text { Price } & \$ 9.00 \
\text { Fixed selling and administrative costs } & 2.00 \
\text { Fixed manufacturing cost } & 1.00
\end{array}$$ What is the target variable cost per unit?

Quizplus · Accepted Answer

To achieve a 20% return on a $100,000 investment, Dyggur Traders needs a total return of $120,000. With 10,000 toys, the total revenue is $90,000 (10,000 toys x $9.00). Fixed costs per unit are $3.00 ($2.00 + $1.00), totaling $30,000 for 10,000 toys. To achieve the target return, the total cost must be $70,000 ($90,000 - $20,000 return). Subtracting fixed costs ($30,000) from total costs ($70,000) leaves $40,000 for variable costs, or $4.00 per unit ($40,000 / 10,000 toys).

Dyggur Traders Wishes to Earn a 20% Return on Its