After conducting a market research study, Stewart Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $120. The annual target sales volume for interior doors is 20,000. Stewart has a 20% expected return on sales target.
1. What is the target cost for each interior door?

The correct statement will be that to achieve an expected return of 20% on its sales of 20000 units, Stewart manufacturing will have to keep its target cost as $96 per unit and earn $24 per unit.

The calculation of the target cost can be done by subtracting the values of expected return from the total selling price of the interior door. Computation is as provided below.

Calculation of target cost.

The calculation of return on target cost will be done with the help of the following formula,

[tex]\rm Return\ on\ Target\ Price= Target\ Price - (Target\ Price\ x\ \dfrac{100- Expected\ Return}{100})[/tex]

Putting the available values into the given formula,

[tex]\rm Expected\ return\ on\ Target\ Price= 120- (120\ x\ \dfrac{100-20}{100})\\\\\\\rm Expected\ return\ on\ Target\ Price= 120- (120\ x\ \dfrac{80}{100})\\\\\\\rm Expected\ return\ on\ Target\ Price= 120-96[/tex]

Calculating further,

[tex]\rm Expected\ return\ on\ Target\ Price= \$24[/tex]

So, we have found that the expected rate of return will be $24. Now we can easily calculate the gross profit as under.

[tex]\rm Gross\ Profit= \$24\ x\ 20000\\\\\\\rm Gross\ Profit= \$480,000[/tex]

Hence, the expected return per unit for Stewart manufacturing will be $24 and total returns for 20000 units will be $480,000.

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