Dell 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 $825 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: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 100,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 700 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ 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

Dell 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 $825 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: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 100,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 700 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ 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 cover both fixed costs and the desired profit from its sales. The desired profit is 6% of $3,100,000, which is $186,000. The total revenue at the current market price is $825 * 100,000 = $82,500,000. The total cost (fixed + variable) is $13,000,000 + ($700 * 100,000) = $83,000,000. To achieve the desired profit, the total cost must be $82,314,000 ($82,500,000 - $186,000). Therefore, the reduction in variable cost per unit needed is ($83,000,000 - $82,314,000) / 100,000 = $6.86.

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