Sawit Corporation, a manufacturer of woodworking tools, wants to introduce a new power screwdriver. To compete effectively, the screwdriver cannot be priced at more than $14. The company requires a 15% rate of return on investment on all new products. In order to produce and sell 80,000 screwdrivers each year, the company will need to make an investment of $800,000. The target cost per screwdriver would be:

Question

Quizplus · Accepted Answer

The target cost per screwdriver is the maximum cost that Sawit Corporation can incur to produce and sell the screwdriver at a price of $14 while still achieving its required rate of return of 15% on its investment.

Using the formula: 
Target Cost = Selling Price × (1 - Desired Rate of Return)
Target Cost = $14 × (1 - 0.15)
Target Cost = $11.90

Since the target cost of $11.90 is less than the investment required of $800,000 to produce and sell 80,000 screwdrivers, Sawit Corporation can achieve its target cost and still earn a 15% rate of return on its investment.

Therefore, the best choice is D) $12.50.

Sawit Corporation, a Manufacturer of Woodworking Tools, Wants to Introduce