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 $15. Shimada’s required rate of return is 12% on all investments. An investment of $6,020,000 would be required to purchase the equipment needed to produce the 516,000 calculators that management believes can be sold each year at the $15 price.

Required:
Compute the target cost of one calculator.

Answer 1

$13.6 per unit

Step-by-step explanation:

Target profit is calculated by multiplying desired percentage of the profit with competitive selling price.

The cost which is calculated by the firm using competitive market price after deducting desired markup. This approach is used to calculate best cost that a company should adopt to be competitive in the market

First we have to calculate the desired profit margin.

Desired profit margin = 12.5% x 6,020,000 / 516,000 = $1.40

As we know the 12% required rate of return is calculated using selling price which is 100%. Target cost is the net of Selling price and profit.

Target Cost = Selling Price - Profit = $15 - $1.4 = $13.6 per unit

Answer 2

Target cost is $13.60

Step-by-step explanation:

Target cost is the competitive market minus the desired profit amount.In other words,the firm first of all establishes the market price which is acceptable to consumers,then deduct its desired profit in order to arrive at the target cost.

In the scenario,the competitive market price is $15

desired profit margin=required rate of return on investment*amount invested/planned number of calculators

required rate of return is 12%

amount invested is $6,020,000

planned number of calculators is 516,000

desired profit margin=12%*$6,020,000/516,000=$1.4

target cost=$15-$1.4=$13.6