Question

Silver Lining Cloud Storage is considering introducing a compact storage device that stores data for companies. Market research shows that 250,000 units can be sold if the price is no more than $18. If Silver Lining decides to produce this device, it will need to invest $500,000 in new equipment. Silver Lining requires a minimum rate of return of 25% on all investments. Determine the target cost per unit for the storage device.

Answer 1

Target cost per unit is $17.50

Step-by-step explanation:

Selling price per unit $ 18 ( We can say market price)

Units can be sold 2,50,000

Investment is $ 5,00,000

Rate of return is 25% on all investments ( We can say desired profit)

Target cost per unit = Market Price per unit - Desired Profit per unit

= $ 18 - $ 0.5

= $ 17.50

Desired Profit per unit = Total Desired Profit / Number of units can be sold

= ( $ 5,00,000 * 25% ) / 2,50,000

= $ 1,25,000 / 2,50,000

= $ 0.5