Clinton Creations believes it can sell 10,000 of its proposed new waterproof camera at a price of $200 each.There will be annual fixed costs associated with developing, marketing and manufacturing the camera of $540,000.If the company desires to make a profit of 40%, how much is the target variable cost per camera?

Question

Quizplus · Accepted Answer

To determine the target variable cost per camera, we need to first calculate the target revenue for selling 10,000 cameras at a price of $200 each:

Target revenue = 10,000 x $200 = $2,000,000

We then need to subtract the fixed costs from this target revenue to find the target contribution margin:

Target contribution margin = $2,000,000 - $540,000 = $1,460,000

Since the company desires a profit of 40%, we can write the profit equation as:

Profit = (Selling price - Variable cost) x Quantity - Fixed costs

where Selling price = $200, Quantity = 10,000 and Profit = 40% of Selling price x Quantity.

Solving for Variable cost, we get:

Variable cost = (Selling price x Quantity - Fixed costs - Profit) / Quantity

Substituting the values, we get:

Variable cost = ($200 x 10,000 - $540,000 - 0.4 x $200 x 10,000) / 10,000 = $66

Therefore, the target variable cost per camera is $66. The correct choice is (C).

Clinton Creations Believes It Can Sell 10,000 of Its Proposed