Dynamo Company is a price-taker. The company produces generators in a highly competitive market; thus, it uses target pricing. The current market price is $600 per unit. The company has $18,500,000 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:
$$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 65,000& \text { units per year } \
\hline \text { Variable costs } & \$ 500 & \text { per unit } \
\hline \text { Fixed costs } & \$ 7,500,000 &\text { per year } \
\hline
\end{array}$$ Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the desired target? Show all computations.

Question

Dynamo Company is a price-taker. The company produces generators in a highly competitive market; thus, it uses target pricing. The current market price is $600 per unit. The company has $18,500,000 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:
 $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 65,000& \text { units per year } \
\hline \text { Variable costs } & \$ 500 & \text { per unit } \
\hline \text { Fixed costs } & \$ 7,500,000 &\text { per year } \
\hline
\end{array}$$ Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the desired target? Show all computations.

Quizplus · Accepted Answer

The Answer of Dynamo Company is a price-taker. The company produces generators in a highly competitive market; thus, it uses target pricing. The current market price is $600 per unit. The company has $18,500,000 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:
 $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 65,000& \text { units per year } \
\hline \text { Variable costs } & \$ 500 & \text { per unit } \
\hline \text { Fixed costs } & \$ 7,500,000 &\text { per year } \
\hline
\end{array}$$ Currently the cost structure is such that the company cannot achieve its profit objective and must cut costs. If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the desired target? Show all computations.

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