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 $760 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 5% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 110,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 670 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ 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 $760 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 5% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 110,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 670 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Quizplus · Accepted Answer

The desired profit is 5% of $3,200,000, which is $160,000. The total revenue at the market price is $760 * 110,000 = $83,600,000. The total variable costs are $670 * 110,000 = $73,700,000. The current fixed costs are $13,000,000. To achieve the profit target, the total costs should be $83,600,000 - $160,000 = $83,440,000. Therefore, the fixed costs need to be reduced to $83,440,000 - $73,700,000 = $9,740,000. The reduction needed is $13,000,000 - $9,740,000 = $3,260,000.

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