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 $3,000,000 in average assets,and the desired profit is a return of 9% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r |l| }
\hline \text { Sales volume } & 110,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 690 &\text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000& \text { per year } \
\hline
\end{array}$$ 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 $3,000,000 in average assets,and the desired profit is a return of 9% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r |l| } 
\hline \text { Sales volume } & 110,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 690 &\text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000& \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Quizplus · Accepted Answer

To achieve the desired target profit, we first calculate the desired profit: $3,000,000 * 9% = $270,000. The total revenue is $800 * 110,000 = $88,000,000. The total cost is desired to be total revenue - desired profit = $88,000,000 - $270,000 = $87,730,000. The current total variable costs are $690 * 110,000 = $75,900,000, and fixed costs are $14,000,000, making current total costs $75,900,000 + $14,000,000 = $89,900,000. To achieve the target, the variable costs need to be reduced to $87,730,000 - $14,000,000 (fixed costs) = $73,730,000. The reduction needed is $75,900,000 (current variable costs) - $73,730,000 (target variable costs) = $2,170,000.

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