Question

Shimada Products Corporation of Japan is anxious to enter the electronic calculator market. Management believes that in order to be competitive in world markets, the price of the electronic calculator that the company is developing cannot exceed $67. Shimada’s required rate of return is 28% on all investments. An investment of $3,100,000 would be required to purchase the equipment needed to produce the 42,000 calculators that management believes can be sold each year at the $67 price. Required: Compute the target cost of one calculator

Answer 1

To compute the target cost of the electronic calculator for Shimada Products Corporation, the total investment must be adjusted for the desired rate of return and then divided by the number of units expected to sell. The initial calculation shows that the target cost per calculator ($94.48) exceeds the desired selling price of $67, indicating that adjustments are necessary for Shimada to be competitive.

Step-by-step explanation:

The student is asking to compute the target cost of a calculator that Shimada Products Corporation is planning to develop. To determine this, we need to consider the total investment, the required rate of return, and the number of units Shimada expects to sell annually. We initiall subtract the total expected return on the investment from the total investment to find out the total allowable cost for all calculators. Then we divide this allowable cost by the number of units to get the target cost per calculator which cannot exceed the set selling price to stay competitive.

1. Determine the total return on investment by multiplying the initial investment by the required rate of return ($3,100,000 x 0.28 = $868,000).
2. Add this annual return to the initial investment to determine the total amount that needs to be recovered each year ($3,100,000 + $868,000 = $3,968,000).
3. Calculate the target cost per calculator by dividing this amount by the number of calculators expected to be sold each year ($3,968,000 ÷ 42,000 ≈ $94.48).
4. Since the target cost exceeds the desired selling price of $67, Shimada will need to reduce costs or reconsider its price or investment to meet the target cost within the competitive range.