Electron Manufacturing is a price-taker.Electron produces large spools of electrical wire in a highly competitive market; thus,the company uses target pricing.The current market price of the electric wire is $760 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 5% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 110,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 660 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \
\hline
\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Question

Electron Manufacturing is a price-taker.Electron produces large spools of electrical wire in a highly competitive market; thus,the company uses target pricing.The current market price of the electric wire is $760 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 5% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 110,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 660 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \
\hline
\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Quizplus · Accepted Answer

To achieve the desired profit, the company needs to cover both variable and fixed costs and still make a profit. The desired profit is 5% of $3,200,000, which is $160,000. The total revenue at the market price is $760 * 110,000 = $83,600,000. The total variable cost is $660 * 110,000 = $72,600,000. The required total cost to achieve the profit target is $83,600,000 - $160,000 = $83,440,000. The current total cost is $72,600,000 (variable) + $12,000,000 (fixed) = $84,600,000. Therefore, the fixed costs need to be reduced by $84,600,000 - $83,440,000 = $1,160,000.

Electron Manufacturing Is a Price-Taker If Variable Costs Cannot Be Reduced,how Much Reduction in Fixed