Ignite Products is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price of the electric wire is $800 per unit.The company has $3,100,000 in average assets,and the desired profit is a return of 7% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 720 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Question

Ignite Products is a price-taker.The company produces large spools of electrical wire in a highly competitive market; thus,it uses target pricing.The current market price of the electric wire is $800 per unit.The company has $3,100,000 in average assets,and the desired profit is a return of 7% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 720 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Quizplus · Accepted Answer

The desired profit is 7% of $3,100,000, which is $217,000. The total revenue at the market price is $800 * 100,000 = $80,000,000. The total cost must be $80,000,000 - $217,000 = $79,783,000. Current total costs are $72,000,000 (variable) + $13,000,000 (fixed) = $85,000,000. Therefore, a reduction of $85,000,000 - $79,783,000 = $5,217,000 in variable costs is needed.

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