Electron Manufacturing is a price-taker.Electron 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 $780 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 4% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | }
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 720 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Question

Electron Manufacturing is a price-taker.Electron 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 $780 per unit.The company has $3,200,000 in average assets,and the desired profit is a return of 4% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | } 
\hline \text { Sales volume } & 100,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 720 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000,000 & \text { per year } \
\hline
\end{array}$$ If variable costs cannot be reduced,how much reduction in fixed costs will be needed to achieve the profit target?

Quizplus · Accepted Answer

First, calculate the desired profit: $3,200,000 in average assets * 4% desired return = $128,000. Next, calculate the total revenue: 100,000 units * $780 per unit = $78,000,000. Then, calculate the total variable costs: 100,000 units * $720 per unit = $72,000,000. Subtract the desired profit and total variable costs from total revenue to find the allowable fixed costs: $78,000,000 - $72,000,000 - $128,000 = $5,872,000. Finally, subtract the allowable fixed costs from the current fixed costs to find the needed reduction: $13,000,000 - $5,872,000 = $7,128,000.

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