Rudy Company sells a product for $450 per unit. Its market share is 25 percent. The marketing manager feels that the market share can be increased to 33 percent with a reduction in price to $390. The product is currently earning a profit of $72 per unit. The president of Rudy Company feels that the $72 profit per unit must be maintained.
-Refer to the figure.What is the target price per unit?

Question

Quizplus · Accepted Answer

To calculate the target price per unit, we first need to calculate the total cost per unit for each product.

For Product AA: 
Total Cost = Direct Materials + Direct Labor + Overhead + R&D + Marketing 
= $30 + $20 + $36 + ($300,000 x 0.65) + ($250,000 x 0.4) 
= $30 + $20 + $36 + $195,000 + $100,000 
= $381,000

For Product BB: 
Total Cost = Direct Materials + Direct Labor + Overhead + R&D + Marketing 
= $25 + $15 + $30 + ($300,000 x 0.35) + ($250,000 x 0.6) 
= $25 + $15 + $30 + $105,000 + $150,000 
= $325,000

Now, we can calculate the target price per unit using the formula: 
Target Price = Total Cost / (1 - Desired Return on Sales)

For both products, the desired return on sales is 12%, so: 
Target Price for Product AA = $381,000 / (1 - 0.12) = $433,636.36 
Target Price for Product BB = $325,000 / (1 - 0.12) = $369,318.18

Therefore, the best choice is Product AA with a target price of $195 per unit. This is because Product AA has a higher total cost per unit, but it also has a higher potential for profit with a higher target price.

Rudy Company Sells a Product for $450 Per Unit