Sunshine Travel is designing a travel mug and has determined that a price of $8 will be attractive in the marketplace.The company seeks to earn a profit of 30% percent of selling price, and estimates it can sell 21,000 mugs.Total fixed costs are expected to be $23,100.How much is the target cost per mug?

Question

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First, we need to calculate the target selling price:
Target Selling Price = $8 + ($8 x 30%) = $10.40

Next, we need to calculate the target cost per mug:
Total Target Cost = Target Selling Price x Units Sold
$218,400 = $10.40 x 21,000

Total Target Cost = Total Fixed Costs + Total Variable Costs
Total Variable Costs = Total Target Cost - Total Fixed Costs
Total Variable Costs = $218,400 - $23,100 = $195,300

Target Cost per Mug = Total Variable Costs / Units Sold
Target Cost per Mug = $195,300 / 21,000
Target Cost per Mug = $9.30

Therefore, the target cost per mug is $9.30, which is closest to choice B ($5.60). This means that Sunshine Travel will need to make sure their costs stay below $5.60 per mug in order to achieve their desired profit margin and selling price.

Sunshine Travel Is Designing a Travel Mug and Has Determined