BLG Corporation produces and sells yachts for wealthy customers. BLG's accountants produced the data shown below as a basis for client negotiations for the coming year: Big Winner Sport Star CEO
Basic yacht $ 600 $ 600 $ 600
Customization costs 300 500 200
Marketing costs 100 400 300
Total costs $1,000 $1,500 $1,100
Assume that all the preceding costs are avoidable. The company will incur an additional $800 in unavoidable costs during the coming year. BLG's managers want to achieve a profit margin of 80% based on total costs.
If unavoidable costs are allocated as a percentage of avoidable costs, the total cost of Sport Star's yacht will be:

Question

Quizplus · Accepted Answer

First, we need to calculate the target price for each yacht to achieve an 80% profit margin based on total costs:

Profit margin = (selling price - total costs) / selling price
0.8 = (selling price - total costs) / selling price
selling price = 5 * total costs

Thus, the target prices for Big Winner, Sport Star, and CEO are:

Big Winner: $5,000
Sport Star: $7,500
CEO: $5,500

Next, we need to allocate the unavoidable costs as a percentage of avoidable costs:

Unavoidable costs / avoidable costs = $800 / ($1,000 + $500 + $800) = 0.421

So, for Sport Star:

Avoidable costs = $1,500 ($600 + $500 + $400)
Unavoidable costs = $1,500 * 0.421 = $632

Total cost of Sport Star's yacht = avoidable costs + unavoidable costs = $1,500 + $632 = $2,132

Therefore, the best choice is C.

BLG Corporation Produces and Sells Yachts for Wealthy Customers