Question

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 $3,000,000 in average assets, and the desired profit is a return of 5% on assets. Assume all products produced are sold. The company provides the following information:
Sales volume 110,000 units per year
Variable costs $660 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. $7,750,000
B. $7,600,000
C. $12,150,000
D. $12,000,000

Answer 1

Answer:

Instructions are below

Explanation:

Giving the following information:

The current market price of the electric wire is $770 per unit.

The company has $3,000,000 in average assets, and the desired profit is a return of 5% on assets.

Sales volume 110,000 units per year

Variable costs $660 per unit

Fixed costs $14,000,000 per year

The company's objective is 5% of average assets. In this case, $150,000.

Total contribution margin= 110,000*110= 12,100,000

Fixed costs= (14,000,000)

Net operating profit= (1,900,000)

Target profit= 150,000

Target fixed costs= Contribution margin - target profit

Target fixed costs= 12,100,000 - 150,000= 11,950,000

Prove:

Total contribution margin= 110,000*110= 12,100,000

Fixed costs= (11,950,000)

Net operating profit= 150,000