Question

Stone Company is considering introducing a new line of pagers, targeting the preteen population. Stone believes that if the pagers can be priced competitively at $45, approximately 300,000 units can be sold. The controller has determined that an investment in new equipment totaling $4,000,000 will be required. Stone requires a minimum rate of return of 16% on all investments. Compute the target cost per unit of the pager.

Answer 1

$42.87

Step-by-step explanation:

From the given question, we recall the following statements.

The Investment in new equipment =$4,000,000

The Minimum rate of return = 16%

The Expected selling price =$45 per pager

The sales estimated =300,000

Then,

Cost of target = the selling price - the profit desired

The Expected return on investment =$4,000,000 x 16% =$640,000

The Estimated profit per pager =640,000/300,000 =$2.13

Therefore desired profit per pager = $2.13

Which is,

$45 -$2.13 =$42.87

Finally, the target cost per unit of the pager =$42.87