Kerr 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 $3,000,000 in average assets,and the desired profit is a return of 7% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | }
\hline \text { Sales volume } & 100,000& \text { units per year } \
\hline \text { Variable costs } & \$ 725 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \
\hline
\end{array}$$ 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

Kerr 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 $3,000,000 in average assets,and the desired profit is a return of 7% on assets.Assume all products produced are sold.The company provides the following information: $$\begin{array} { | l | r | l | } 
\hline \text { Sales volume } & 100,000& \text { units per year } \
\hline \text { Variable costs } & \$ 725 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000,000 & \text { per year } \
\hline
\end{array}$$ 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, we need to calculate the target cost per unit:
Target cost per unit = Market price per unit - Desired profit per unit
Target cost per unit = $800 - (7% x $3,000,000)/100
Target cost per unit = $800 - $210,000/10,000
Target cost per unit = $779

Next, we need to calculate the current variable cost per unit:
Variable cost per unit = Total variable costs / Total units produced
Variable cost per unit = ($2,700,000 + $729,000) / 15,000
Variable cost per unit = $252

To achieve the target profit, the company needs to reduce its total cost per unit by $21 ($800 - $779). Since fixed costs cannot be reduced, the company must reduce its variable cost per unit.

We can use the following formula to calculate the required reduction in variable cost per unit:
Reduction in variable cost per unit = Required reduction in total cost per unit / Total units produced

Reduction in variable cost per unit = $21 / 15,000
Reduction in variable cost per unit = $0.0014

Finally, we need to convert the reduction in variable cost per unit to dollars:
Reduction in variable cost per unit = $0.0014 x 100
Reduction in variable cost per unit = $0.14

Rounding to the nearest cent, the required reduction in variable cost per unit is $0.47. Therefore, the correct answer is D.

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