Meson Productions is a price-taker
Meson 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 $770 per unit. The company has $3,100,000 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:
Sales volume 110,000 units per year
Variable costs $680 per unit
Fixed costs $14,000,000 per year
If variable costs cannot be reduced, how much reduction in fixed costs will be needed to achieve the profit target?
A) $4,224,000
B) $14,000,000
C) $4,100,000
D) $14,124,000
A .A)
Current variable costs ($680 per unit) $74,800,000
Plus: Fixed costs 14,000,000
Full product cost $88,800,000
Total sales ($770 per unit) $84,700,000
Less: Target profit ($3,100,000 x 4%) 124,000
Target cost $84,576,000
Fixed costs must be reduced by $4,224,000 ($88,800,000 - $84,576,000 ) to achieve the profit target.
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