Ignite Products 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 $700 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | }
\hline \text { Sales volume } & 120,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 660 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ If fixed costs cannot be reduced,how much reduction in variable costs will be needed to achieve the desired target?

Question

Ignite Products 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 $700 per unit.The company has $3,000,000 in average assets,and the desired profit is a return of 8% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | l | l | } 
\hline \text { Sales volume } & 120,000 & \text { units per year } \
\hline \text { Variable costs } & \$ 660 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000,000 & \text { per year } \
\hline
\end{array}$$ 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, first calculate the desired profit: $3,000,000 in average assets * 8% desired return = $240,000. Next, calculate the total revenue: 120,000 units * $700/unit = $84,000,000. To find the target total cost, subtract the desired profit from total revenue: $84,000,000 - $240,000 = $83,760,000. The current total cost is the sum of variable costs and fixed costs: (120,000 units * $660/unit) + $14,000,000 = $79,200,000 + $14,000,000 = $93,200,000. The reduction in variable costs needed is the difference between the current total cost and the target total cost: $93,200,000 - $83,760,000 = $9,440,000.

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