Trina 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 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 6% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r |l| }
\hline \text { Sales volume } & 110,000& \text { units per year } \
\hline \text { Variable costs } & \$ 690& \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000& \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Question

Trina 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 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 6% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r |l| } 
\hline \text { Sales volume } & 110,000& \text { units per year } \
\hline \text { Variable costs } & \$ 690& \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000& \text { per year } \
\hline
\end{array}$$ 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 6% of $3,100,000, which is $186,000. The total revenue at the current market price is $800 * 110,000 = $88,000,000. The total cost needs to be $88,000,000 - $186,000 = $87,814,000. Current total costs are $13,000,000 (fixed) + $690 * 110,000 (variable) = $88,900,000. The reduction needed in variable costs is $88,900,000 - $87,814,000 = $1,086,000.

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