Trina Productions is a price-taker

Question

The company produces large spools of electrical wire in a highly competitive market; thus, it uses target pricing. The current market price of the electric wire is $800 per unit. The company has $3,100,000 in average assets, and the desired profit is a return of 6% on assets. Assume all products produced are sold. The company provides the following information:

Sales volume 110,000 units per year
Variable costs $690 per unit
Fixed costs $13,000,000 per year

If fixed costs cannot be reduced, how much reduction in variable costs will be needed to achieve the desired target?
A) $186,000
B) $13,000,000
C) $1,086,000
D) $75,900,000

Answer 1

C .C)
Variable costs ($690 per unit) $75,900,000
Fixed costs 13,000,000
Total costs $88,900,000

Total sales ($800 per unit) $88,000,000
Less: Target profit ($3,100,000 x 6%) 186,000
Target cost $87,814,000

Variable costs must be reduced by $1,086,000 ($88,900,000 - $87,814,000 ) to achieve the profit target.