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 $800 per unit.The company has $3,100,000 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: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 100,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 750 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \
\hline
\end{array}$$ 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 $800 per unit.The company has $3,100,000 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: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 100,000 &\text { units per year } \
\hline \text { Variable costs } & \$ 750 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \
\hline
\end{array}$$ 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

First, calculate the desired profit: $3,100,000 * 9% = $279,000. The total revenue from sales is $800 * 100,000 = $80,000,000. To achieve the desired profit, total costs must be $80,000,000 - $279,000 = $79,721,000. The fixed costs are $12,000,000, so the total variable costs allowed are $79,721,000 - $12,000,000 = $67,721,000. The variable cost per unit must be $67,721,000 / 100,000 = $677.21. The current variable cost is $750, so the reduction needed is $750 - $677.21 = $72.79.

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