Meson Productions is a price-taker.Meson 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 $770 per unit.The company has $3,100,000 in average assets,and the desired profit is a return of 4% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 110,000& \text { units per year } \
\hline \text { Variable costs } & \$ 680 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Question

Meson Productions is a price-taker.Meson 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 $770 per unit.The company has $3,100,000 in average assets,and the desired profit is a return of 4% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 110,000& \text { units per year } \
\hline \text { Variable costs } & \$ 680 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ 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, Meson needs to cover both variable and fixed costs and still earn a 4% return on assets. The desired profit is 4% of $3,100,000, which is $124,000. The total revenue at the market price is $770 * 110,000 = $84,700,000. The total variable cost is $680 * 110,000 = $74,800,000. To find the required fixed cost reduction, calculate the current profit: $84,700,000 - $74,800,000 - $14,000,000 = -$4,100,000. To achieve a profit of $124,000, the fixed costs need to be reduced by $4,224,000 ($4,100,000 + $124,000).

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