Kerr Productions 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 is $800 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 725 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ 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 reduction in variable cost per unit will be needed to achieve the desired target? (Round your answer to the nearest cent.)

Question

Kerr Productions 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 is $800 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 725 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ 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 reduction in variable cost per unit will be needed to achieve the desired target? (Round your answer to the nearest cent.)

Quizplus · Accepted Answer

To achieve the desired profit, the company needs to earn $240,000 (8% of $3,000,000) in profit. The current contribution margin is $75 per unit ($800 - $725). Total contribution margin is $7,500,000 (100,000 units x $75). After covering fixed costs of $14,000,000, the company has a loss of $6,500,000. To achieve the desired profit, the contribution margin must be $14,240,000 ($14,000,000 + $240,000). This requires a contribution margin of $142.40 per unit ($14,240,000 / 100,000 units), meaning the variable cost must be reduced by $67.40 ($142.40 - $75).

Kerr Productions Is a Price-Taker Currently the Cost Structure Is Such That the Company Cannot