Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information:
$$\begin{array} { | l | r | r | }
\hline \text { Sales volume } & 90,000 & \text { Units per year } \
\hline \text { Variable costs } & \$ 680 & \text { Per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { Per year } \
\hline
\end{array}$$
-
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs CANNOT be reduced, how much does the variable cost per unit need to be in order to hit the profit goal? (Please round to the nearest cent.)

Question

Maxi Production is a price-taker. They produce large spools of electrical wire in a highly competitive market, and so they practice target pricing. The current market price is $800 per unit. The company has $2,000,000 in assets and shareholders expect a return of 5% on assets. The company provides the following information:
$$\begin{array} { | l | r | r | } 
\hline \text { Sales volume } & 90,000 & \text { Units per year } \
\hline \text { Variable costs } & \$ 680 & \text { Per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { Per year } \
\hline
\end{array}$$
-
Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If fixed costs CANNOT be reduced, how much does the variable cost per unit need to be in order to hit the profit goal? (Please round to the nearest cent.)

Quizplus · Accepted Answer

To achieve the profit goal, the company needs to cover both fixed costs and the expected return on assets. The required profit is $2,000,000 * 5% = $100,000. Total revenue at the current market price is $800 * 90,000 = $72,000,000. Total costs must be $72,000,000 - $100,000 = $71,900,000. Fixed costs are $12,000,000, so variable costs must be $71,900,000 - $12,000,000 = $59,900,000. Dividing by 90,000 units gives a variable cost of $665.56 per unit.

Maxi Production Is a Price-Taker - Currently the Cost Structure Is Such That the Company

Maxi Production Is a Price-Taker -
Currently the Cost Structure Is Such That the Company